BNA Pension and Benefits Blog

Thanksgiving Feast or Famine? - DOL Withdraws its Investment-Advice Regulation

The DOL has withdrawn its investment-advice regulation, culminating a process that began with a firestorm of objection regarding the DOL's attempt to implement the PPA's new investment-advice exemptions. The PPA's exemptions were controversial when passed, and became more controversial when the Department interpreted certain fee-leveling requirements in a manner that was perceived to be narrow. Then, in the final regulations, the Department added a new administrative exemption that narrowed the requirements still further, touching off congressional accusations that questioned the regulatory process itself.

The shrillness of some of the rhetoric was, to me (see my prior post on this), unfortunate, as efforts over a long and arduous regulatory process by dedicated public officials became characterized and impugned as special-interest gifts bestowed on the eve of a change in administrations. In an interesting rhetorical twist, which had the intended public-relations consequences, what I would have more neutrally called "inside" advice came to be referred to pejoratively as "conflicted" advice.

With the change in administrations, those upset with the regulations became empowered, and their influence within the DOL increased dramatically, as one might expect. The Department's actions now indicate that there will be some narrowing of the rules, but it remains to be seen whether a reproprosed rule will so narrowly interpret the statutory exemption that it will essentially marginialize it altogether. That could happen if, for example, the level-fee requirements were to be interpreted so as to require structures that are so sanitized that the structures don't involve self-dealing at all, in which case no exemption would be necessary. (I would expect the prior work done regarding the computer-model exemption to be relatively less controversial, and would be surprised if the Department would propose dramatically reversing that aspect of the regulations; we'll have to wait and see.)

To me, what amounts to a regulatory repeal of the statutory exemption would be unfortunate. The PPA struck a legislative balance given the legitimate and crying need that participants have for this advice, on the one hand, and conflicts that may arise, on the other. The Department's new proposals will hopefully not, by fiat, effectively repeal the fee-leveling exemption.

I think it is critically important that a wide range of professional advice be made available to 401(k) participants, who are in desperate need of professional advice. I think that one of the great deficiencies in current retirement policy is that, with the move to a focus on participant-directed defined contribution plans, which is the result of a confluence of events over time, what may be among the most important of investment assets - retirement assets - are left under the management of those (like me) often utterly untrained in how to invest those assets.

The PPA struck a balance that would have facilitated the provision of additional types of advice. Was the balance struck in the statute the precisely correct one? That, of course, is always open to discussion, but Congress did act. There now are proposals in Congress that would recut the rules, in effect eschewing any effort to balance the competing considerations and deciding that no conflict is tolerable, and the approach taken in those proposals is extreme. I think it would be unfortunate if Congress were altogether to take away from employers the ability to arrange for reasonably crafted inside advice delivered with proper safeguards (what I've called "conflict-safe," as opposed to "conflict-free," advice). In any event, though, the Department should credibly implement the rules that have passed, unless and until Congress reverses those rules.

And to what point does that bring us? At a minimum, I would expect the DOL to cut back or reverse the administrative exemption that goes beyond the statute; but we'll have to see how much farther they go in trying to narrow the statutory rules that are already there. At the end of the day, wherever it all lands, I hope that we wind up with a system that permits participants and beneficiaries to have a reasonable shot at accessing a wide range of professional advice to help them through the investment of their retirement nest eggs.

What's a DB Plan Administrator/Advisor to Do

Disclaimer:  The comments below represent my own opinion and do not necessarily represent those of my employer or any organization to which I may belong.

Administrators of defined benefit plans and other professionals dealing with them have had a real problem on their hands this year.  2008 is now half over and a significant amount of clear, final guidance on how the Pension Protection Act applies to plans has not been issued.  We have a new law.  Many provisions are effective for the 2008 plan year (some act provisions were effective even earlier).  We really can’t blame the IRS for this because Congress passed the biggest overhaul of pension law since ERISA and then dumped the whole regulatory mess in the lap of the Service.

We have some proposed regulations.  The effective date of the [yet to be issued] final regulations have been put off until 2009.  What are we to do in the meantime?  A “reasonable interpretation” will be acceptable.  This seems to have replaced “good faith reliance”.  At times, “reasonable’, like beauty, is in the eye of the beholder. We can also rely on the proposed regulations.  In the preambles, we have been asked for comments on certain issues that the Service is considering.  Can we rely on this request for comments?  Are administrators, actuaries, and lawyers going to be left holding the bag when final regulations are issued?  What worries me is that what many think is a reasonable interpretation of the language of the law may turn out to be not reasonable when the final rules are in.

My question to this forum is, what have you been doing in 2008 when dealing with your defined benefit plans, especially in two areas:  where no proposed regulations have been issued and where musings in preambles and in open forums by government representatives are disagreed with by practitioners?

PPA Relief?

Not being a Washington type, I am not privy to who is lobbying for what provision in proposed legislation. After wading through the new prohibited transaction exemption which was added by the Pension Protection Act, now found in ERISA section 408(b)(14) and limited by the terms of section 408(g), I wondered who lobbied for this and how useful will it be?

The newly added section 408(b)(14) provides an exemption from the prohibited transaction provisions of section 406 for the receipt of fees or other compensation (which compensation must be reasonable) by a “fiduciary advisor” for the provision of advice or in connection with an acquisition, holding or sale of a security or other property available as an investment under the plan pursuant to the investment advice from the "fidiciary advisor".

A “fiduciary advisor” is defined as a registered investment advisor; a bank or similar financial institution referred to in section 408(b)(4) or a savings and loan association (but only if the advice is provided through a trust department of the bank or similar financial institution or savings association); an insurance company; a registered broker dealer; or an agent, employer, registered representative of any of the above. The advice must be given to a participant or beneficiary of an individual account plan who is self directing the investment.

Further, the advice must take place in the context of an “eligible investment advice arrangement”. An “eligible investment advice arrangement” requires either that any fees or other compensation received by the fiduciary advisor do not vary depending on the basis of any investment option selected or the arrangement uses a computer model under an investment advice program which meets the elements set forth in section 408(g)(3).

With respect to the computer model, in addition meeting the elements of section 408(g)(3), the computer advice program must be certified in accordance with rules established by the Secretary of Labor; the computer program must be recertified if there are material modifications; the only advice provided under the program must be the advice provided by the computer model and the transaction must occur solely at the direction of the participant or beneficiary.

The "eligible investement advice" arrangement must be expressly authorized a separate plan fiduciary other than the person offering the investment advice program; an independent auditor who has appropriate technical training or experience or proficency must audit the program annually and issue a report to the fiduciary who authorized the use of the arrangement presenting specific findings regarding compliance of the arrangement with the exemption; there are extensive disclosure rules including a model disclosure form to be provided by the Secretary of Labor for fees and other compensation; and the fiduciary advisor must acknowledge in writing its fiduciary status with respect to the plan.

While my limited intellectual capabilities cannot possibly fathom every possible prohibited transaction this exemption covers, it obviously is designed to provide some protection to plan sponsors who formally appoint fiduciary advisors to provide investment advice to participants in their 401(k) plans, where the advisor gives investment advice and takes a commission or other fee based on the investments recommended without running afoul of some of those tricky 406(b) violations lurking in a lot of 401(k) arrangements.

Will this new exemption provide a great marketing tool for the 40l(k) financial service providers?

Will it create a new niche for experts in 401(b)(14) arrangments?

Will this become the new standard for 401(k) arrangements or is it just too complex to be workable?

Default Investments

In the PPA, Congress endorsed (and well it should have) automatic enrollment 401(k) plans by adopting legislation to make it easier for employers to sponsor such plans.

One issue addressed by the PPA was the appropriate default investment option, since some if not many employees automatically enrolled in such plans will not designate an investment choice. Will a plan fiduciary have liability simply because of the type of default investment option to which salary deferrals are mapped in the absence of participant direction? In particular, will the plan qualify under ERISA section 404(c) as a self-directed plan?)

The PPA directed the Department of Labor to issue rules on permissible default investment options when an employee does not direct how assets are to be invested. The DOL issued proposed regulations in September.

Under the proposed regulations, a plan may use one of three alternative types of funds as the default investment for automatic enrollment plans. The default options are essentially the following: (1) a life-cycle or retirement-date type funds; (2) balanced funds; or (3) individually managed accounts in which assets are allocated on a life-cycle model. The regulations do not permit the use of money-market or stable value funds because the Department of Labor does not believe such funds will generate sufficient returns to provide adequate retirement savings.

I am sympathetic to the Department’s position about money-market and stable value funds, but I wonder whether there should be a window period, perhaps three to six months, where a plan could temporarily park a participant’s initial contributions to a plan in a money-market or stable value fund. (After the window period funds would be mapped to one of the qualified default investment vehicles currently identified in the proposed regulations.)

Use of a “safe” fund for a window period might temper the inclinations of some employees to opt out of participation in response to an early loss of principal. It might also make it more likely that some employees will actually consider how they want their money invested rather than simply having the plan direct contributions to a qualified default fund. (I am assuming that some employees who might accept the default investment chosen by the employer would think about where they wanted their money invested if it would otherwise sit for a few months in a money-market fund. Of course, one could argue that employees might be better off in the plan’s qualified default investment than they would if they make their own investment decisions.)

In any event, employers often know their workforces better than the Department of Labor does and if an employer thinks that a money-market fund is appropriate for its workforce for a relatively brief period of time, the Department should probably respect the employer’s insight.

There would be another advantage to permitting the employer to use a money-market default fund for a brief period of time. Under the proposed regulations, a participant must be given notice, 30 days before initial investment of funds, about the plan’s investment options. Presumably this is in the regulation because it ensures that every employee has either selected an investment option or impliedly consented to the plan’s default investment fund before they have contributed to the plan. If there is loss to principal, the employee will have expressly or impliedly consented to the investment fund in which the loss occurred.

But some observers think that employees do not like to see their paycheck decline after a month of employment and that seeing such a decline may cause some to opt of plan participation (to get their paycheck up to where it was the first month of employment). So how do we square this concern with the Department’s concern that participants might suffer a loss before having time to select an investment option? By mapping the contributions to a risk-free fund until the employee has time to choose another investment option. And if the employee does not exercise that right within the specified window period, then the employee’s account gets automatically mapped to a permissible default fund. (And if the employee decides to opt out, the employee can get their contributions returned without loss of principal.)

Before posting this, I spoke with Marc Iwry, who tells me that he and some others submitted comments to the Department of Labor along these lines. Their comments, in my view, deserve careful consideration. Given this blog, its no surprise that this is my view!

Section 420 Transfers by Multiemployer Plans

     A little-noted feature of the Pension Protection Act is its provision extending to multiemployer pension plans the opportunity to transfer "excess" assets to fund retiree health benefits.  Until now, only single employer pension plan sponsors were permitted to make such transfers. 

     The fact that the effort was made to include such a provision in the PPA suggests that there are at least some well-funded multiemployer pension plans that are in a position to transfer such "excess" assets to a more financially stressed affiliated health benefits plan.  The question arises, however, as to whether this provision will really prove workable or attractive for multiemployer plans.

     The amendment to Section 420 of the Code takes account of the fact that this section was originally written for single employer plans, by stating that it shall be applied to multiemployer plans in accordance with such modifications as Treasury determines appropriate to reflect the fact that the plan is not maintained by a single employer. 

     Presumably, regulations to implement this directive will not have a claim on Treasury's most immediate attention.  Yet they would seem essential.  For example, Section 420's definition of "excess" assets is now cast in terms of funding rules that apply only to single employer plans.  (Here there is a further problem for all plans - - single or multiemployer - - that might wish to utilize Section 420.  BNA, on September 13, quoted Nell Hennessy as pointing to "an incredible typo" in the amended Section 420, which mistakenly defines "excess" in terms of assets that exceed the "funding shortfall" rather than assets that exceed the "funding target."  In all likelihood this will require an eventual legislative fix.)

     In addition, there are other existing provisions of Section 420 that may prove particularly difficult for multiemployer plans to work with.  Section 420(b)(2) states that only one transfer a year may be made to pay for retiree health benefits that are provided during that year, which seemingly imposes an impossibly tricky forecasting problem.  If more assets are transferred than are necessary to pay for the retiree health benefits that are provided during that year, then the excess must be returned to the pension plan, subject to a 20% excise tax.  If, on the other hand, the single transfer turns out to be insufficient there may be no practical way to precisely adjust employer contributions to make up the shortfall, as Section 420(d)(2) states that an employer may not contribute any amount to a welfare benefit fund with respect to health liabilities for which transferred assets are required to be used.

     Other rules that must be taken into account are Section 420(c)(3)'s requirement that if there is a transfer of pension assets, health benefits may not be significantly reduced for a period of five years - - which may limit a health benefit plan's options in searching for ways to cut costs, such as by increasing deductibles and co-payments.  And Section 420(c)(2)(A) requires that for a transfer to be "qualified," all accrued benefits under the pension plan must be fully vested - - thereby imposing an additional cost that some multiemployer plan sponsors may be reluctant to incur. 

     All in all, I strongly suspect that without modifications that Treasury is unlikely to adopt, Section 420 transfers will probably not prove sufficiently attractive for multiemployer plan sponsors to pursue.  Does anyone have a different assessment?

Participant Diversification Requirement

Employers are being inundated with a press of new guidance issued by government agencies on many new employee benefit requirements with which the failure to comply can result in some fairly stiff penalties.  Guidance such as that issued by Treasury at the beginning of this month on section 901 of the Pension Protection Act of 2006 (the Act) which establishes participant diversification rights for publicly traded employer securities held in defined contribution retirement plans (other than certain ESOPs).  While the guidance is certainly welcomed because it fills some "need to know" gaps in the short run, the Notice raises some immediate significant areas of concern for employers.

The Act establishes as a new plan qualification requirement (new Code section 401(a)(35)) for investment diversification applicable to publicly traded employer securities held by defined contribution plans and certain ESOPs.  IRS Notice 2006-107, provides guidance on the new Act diversification rules, one of which requires 30 days advance notice to participants before the first day that participants are eligible to direct diversification of their accounts out of employer securities.  The Notice provides employers with some breathing space and advises employers that the new participant notice requirement can be satisfied as late as January 1, 2007, for calendar year plans.  This still means, however, that employers have to figure out who must get the notice and what the notice should say and send it by year end. 

One issue is whether employers that already allow participants to diversify out of employer stock (i.e., their plans already contain full diversification rights), have to advise participants by January 1, 2007, of their right to do so, which likely would be duplicative especially if the information already is contained in an SPD).  The Notice contains a model notice (requiring customization), but the IRS has requested comments on ways to improve the model notice.

While the reason for the new statutory provision is to ensure that participants in defined contribution plans (sponsored by publicly traded employers) receive diversification rights where the employer's plan invests in comapny stock, has a company stock fund or matches employee contributions with company stock, as a result of ENRON and the spate of litigation that followed in its wake, many employers already have modified their plans to allow employees to diversify out of employer stock.  What is hitting many employers who have already provided for diversification out of employer stock in their defined contribution plans is how to comply with these notice requirements.  Does it make sense for an employer to send out 50,000 notices to employees in its 401(k) plan by the end of the year telling them about a right they already have (and presumably already know about)?

Some government representatives at Treasury and the IRS have pointed to an alternative purpose of the employee notice -- to educate employees concerning the importance of diversifying their investments.  When asked whether an employer needs to send notices (by year end) to employees in plans that already contain the required diversification, these representatives have suggested that notices may still be required.

Should publicly traded employers with defined contribution plans holding company stock send out notices before the end of the year even if their defined contribution plans satisfy the diversification requirements of the statute?  Although some practitioners think this is absurd, this practitioner thinks it is better to be safe than sorry.  Any thoughts?

Pension Protection Act Redux?

With the dust clearing on the recent mid-term elections, we thought it might be beneficial to speculate on what, if any, effects the Democratic takeover of Congress might have on the recently enacted Pension Protection Act.  When the Act passed earlier this year, a number of key House Democrats voted against the Act, including Rep. George Miller (D), the likely chair of the 110th Congress’ House Committee on Education and the Workforce and Rep. Robert Andrews, the likely next chair of the House’s Subcommittee on Employer-Employee Relations.  With their rejection of the bill, the committee and subcommittee with jurisdiction over the Act may move to re-address the issues that troubled them when the Act was passed.  Such issues may include the Act’s provisions related to amendments to ERISA’s prohibited transaction provisions regarding the furnishing of investment advice to plan participants and beneficiaries, which when voting on the initial House version of the Act (H.R. 2830), Rep. Miller stated on behalf of the Democrats that several of the Act’s amendments did not provide enough protection for the private pension system.  See Minority Views, H.R. 2830, “Pension Protection Act of 2005” (Sept. 21, 2005), http://edworkforce.house.gov/democrats/hr2830views.html.  Although the Democrats have expressed a number of priority issues for the new Congress (like increasing the minimum wage and reforming No Child Left Behind), those Pension Protection Act issues that concerned the Democrats earlier this year may raise their heads yet again.

PPA Issue

The general direction given to those of us in the position of being a guest commentator for a week on this new blog was to “write about something that interests you”.  I’m not sure Sarah’s directions would quite encompass my interest in how well the Bears are doing this year and pondering how long this glorious winning streak will last as well as what the post-season will bring—so I will not write about what really is of interest to me—although I’m sure if I did, there would be a lot of interesting comments and other points of view expressed.  So let’s look for something else of interest.

Company stock is always fun, so let’s go there.

We seem to be near the end of the “stock drop” litigation explosion, which has given many plan sponsors heartburn, even if they were not involved in litigation.  Much has been written and discussed as to what steps should be taken to avoid or minimize potential exposure to the issues and many plan sponsors have made changes to their plans and/or committee structures.  But before they can catch their breath, along comes the new kid on the block—the Pension Protection Act of 2006.

The PPA has provisions focused on 401(k) plans which have a company stock option as part of their structure and adds new diversification requirements along with mandated information notices to participants addressing the benefits of diversification of their plan accounts.

Since company stock has had a long history in retirement plans, one would assume plan sponsors will not retreat wholesale from continuing to provide the option, especially since there are financial benefits to making matching contributions in company stock, but will the option stay the same?  Will plan sponsors comply and continue the option in their 401(k) plans?  Will plan sponsors reconsider continuing the option? Or will the option be continued in a different form—such as moving it to a stand alone ESOP—in order to keep certain restrictions on diversification?  If it is moved, will the fact that it was once part of a 401(k) plan have any taint?

A small focus, but seemingly one with a potential for attracting a great deal of interest.  What thoughts, dear reader, do you have?

Some Random Reflections on the PPA and Cash Balance Plans

The PPA has some interesting cash balance provisions, including a prohibition on cash balance plans whose interest credits exceed market rates of return.  The reason for this prohibition is clear enough: if an interest credit is higher than investment returns available in the market, the interest rate will favor younger plan participants, since they will have the benefit of the above-market rate for a longer period of time than older plan participants.  Or put another way, a compensation credit that will grow in synch with an above-market interest rate will have a higher present value for a younger employee than for an older employee, assuming, as we should, that present value will be determined with a market discount rate.   

This raises the question of what a market interest rate of return is. Suppose a plan provides that interest credits will reflect the return on an equity index, and if we like, a rather risky equity interest that might pay spectacular returns if things go well.  Suppose further that the cash balance plan says that your account will be credited with positive returns, but not negative returns.  In years of negative return, your account will still grow, but only to reflect new compensation credits. 

Is this a market rate of return?  Well no, you get the possibility of spectacular returns only if you are willing to shoulder the corresponding risks, which include loss.

But can a plan offer such an interest credit?  Possibly yes: the PPA says that a plan shall not be treated as failing to meet the market-rate interest credit requirement “merely because the plan provides for a reasonable minimum guaranteed rate of return or for a rate of return that is equal to the greater of a fixed or variable rate of return.”

So let’s put into our plan that interest credits are equal to the greater of our equity index or 1%.  If such an investment option were available on the market, I would certainly like to invest in it. 

I suppose that Treasury regulations might try to put a stop to this, focusing on the word “merely” and regard the above arrangement as abusive and thus not providing a market interest rate.  This would seem to be a stretch under the language of the PPA.  And what if the equity index were a standard market index, say the Willshire 5000.  Presumably this would not be abusive, but the problem is still there: anyone would love to invest in an instrument that gives you the full upside of an index but insulates you against any market declines.  Perhaps this can be fixed in regulations, but as I said, I think the language of the statute might make a regulatory fix a bit problematic.

It should also be said that the PPA says that an interest rate shall in no event result in the account balance or similar amount being less than the aggregate amount of pay credits.  So the statute actually makes it illegal to provide a true market rate of interest if the rate is pegged to any index that can go negative, since a participant’s losses are capped at the prior investment gains on a participant’s account.  In the real world, of course, your initial capital (in cash balance plans, the compensation credits) would also be at risk.

The drafters of the statute had a sensible idea about market rates of interest, but then wrote rules that are in effect conceptually incoherent. 

Now where is this likely to lead to problems?  I think primarily with cash balance plans adopted by small firms, where most of the rank-and-file employees will have a relatively short period of plan participation.  Here, the owners are likely to enjoy the favorable interest rate for a long period of time, while rank-and-file participants may not. (And you can probably exclude from cash balance participation those rank-and-file employees who are likely to have long periods of participation.) 

Section 415 of course puts some limits on how large a benefit an owner can get by defining interest credits in a way that provides the possibility of high returns but protects against the full impact of the possibility of losses.  But I also suspect that the next legislative push on cash balance plans will include proposals to allow cash balance plans to choose whether to be subject to either the defined benefit or defined contribution section 415 limit.  And if this happens, the planning possibilities for cash balance plans in small firms are perhaps not limitless, but getting there. 

By the way, does anyone think that any large or medium-sized businesses that do not already have cash balance plans are going to adopt new cash balance plans (or convert existing traditional defined benefit plans into cash balance plans)?  I don’t.  I just don’t see what benefits cash balance plans offer such firms over true defined contribution plans.

On the other hand, I do think there will be interest in new cash balance plans by small, owner-dominated firms, where cash balance plans already seem to offer some interesting planning possibilities.  But that is another blog for another time.  

A Turning Point for Labor?

Since the signing of the Pension Protection Act, the aura of pessimism that continues to hang over the future of private-sector DB plans has been relieved in many quarters by bullish excitement over the potential that the DC plan provisions of the PPA may hold in store for the American workforce -- particularly for the majority of working Americans who are unprotected by any income floor in retirement other than Social Security.

This past month, your blogger has been struck by press reports that Big Labor seems to be moving to the front burner, for serious discussion, hybrid structures that in an earlier day might have been stored away in Labor's research drawer marked "Contingency Plans," to be opened only in the event of a general DB meltdown. Damon Silvers, one of Labor's staunchest advocates, has been quoted to concede that "[o]ur current [pure DB] system is failing," and urges moving away from it now because "[b]y the time [the failure] becomes apparent to the majority of employees, it will be too late."  Silvers's own employer, the AFL-CIO, has formally announced principles of retirement income policy that embrace carefully structured DC plans. Reportedly, the SEIU also has in mind a hybrid plan model that employs individual, portable accounts but with pooled investment risk and primarily an annuity form of distribution at retirement. 

Commentators on the pension scene view it as highly significant that these major unions, traditional supporters of DB plans, are looking at models that, while preserving some elements of those plans, aim to expand the role of DCs in building atop the Social Security floor to provide retirement income at an adequate "replacement" level.  In this lexicon, adequacy translates to 70% of pre-retirement income.

Both within and beyond the labor camp, the bullish outlook on the future for DC plans rests on the most salient features of the PPA reforms: automatic enrollment, default investment options and, within the latter, managed accounts. These features were made all the more concrete by last week's DoL/EBSA release of the PPA regulations proposed as 29 CFR Part 2550 (Default Investment Alternatives Under Participant Directed Individual Account Plans) (71 Fed.Reg. 56806 (Sept. 27, 2006). Like so many works in the rule-making genre, the proposed rule itself occupies little more than four columns, or about 1.35 pages of FR text, preceded by more than 16 pages of the required preliminaries, which in this case put a lot of flesh on the barebones rules.

I especially commend for the serious attention of policy wonks the social research sources cited and summarized in midget font in many of the footnotes throughout these pages -- most often the product of outstanding scholars in the field of what an increasing number of institutions label Financial Gerontology. Among other issues, the sources deal empirically with the incidence of automatic enrollment, its impact on participation, and the percentage distribution of default investment options actually chosen under automatic enrollment plans today.

As one might expect, overall a clear majority of DC plan participants pick the most conservative options (fixed-income, no equity).  The proposed rule clearly seeks to inject into the default investment choices a mix of asset classes consistent with capital preservation or long-term capital appreciation, or a blend of both, with age meant to be most often the driving factor in guides to the participant.  The aim is to defeat mindless default investing that over the career of the employee "is not likely to generate sufficient savings for a secure retirement." 17 FR at 56806.

Readers will have direct access to summaries of the proposed rule in BNA and other commercial services as well as in CLE program materials. 

Of greatest interest to me, with my practice focus on issues of shareholder rights and corporate governance, is the provision of proposed § 2550.404(c)-5(c)(4) of the rule which requires, for a default investment alternative to make the grade as a  "qualified default investment alternative" (a "Q-DIA"?), that material provided to the plan relating to a participant's or beneficiary's investment in a Q-DIA, including prospectuses and proxy voting material, will be provided to the participant and beneficiary.  Employing assumptions from other parts of other economic analyses in the preamble to the proposal, DoL makes the assumption that at any given time, 5.3% of the participants and beneficiaries in participant-directed individual account pension plans, or more than 2.3 million individuals, will have default investments that will call for providing them with these "pass-through" materials on a quarterly basis, certain of them on other occasions as well. This "paperwork," estimated to amount to 9,404,000 responses (distributions of these materials) to participants per year, obviously iimpose additional cost burdens but come with the territory. 

From a shareholder perspective, I would guess that the proxy-voting materials among these distributions in the Q-DIA sector would turn out to be mostly those applicable to mutual funds under management by an investment manager or the fund groups themselves, and much less frequently those on voting individual company shares in the kind of professionally "managed account" that may equally qualify as a Q-DIA. It is questionable whether the union and Taft-Hartley funds that today attempt to exert their DB-plan-rooted "pension power" on director elections, executive compensation plans, and other proxy ballot items can make their proxy voting policies and worker education efforts felt at the beneficial owner level of participant-directed plans that go the Q-DIA route.

Over decades, the continuing decline, freezes and many ultimate terminations of DB plans in the private sector, combined with the widely hoped-for and expected robust growth in both pure DC and hybrid individual-account plans, with a heightened role for long-term equity allocations, will gradually result in fragmenting to a significant degree the "pension power" that labor constituencies have plied in their corporate affairs programs.  This then may be one of the prices that Labor may pay for improvements in the American workers' retirement security system which depend on advancing and promoting the growth and heft of DC plans in that system.

By way of postscript, it warrants saying that the proposed rule, and all else that has been noted here, apply only to the ERISA-covered world.  As charted in DoL's preamble, the rule does not apply to state, local, and/or tribal government plans. Attacks against traditional DB plans in that sector are both political and parochial and the inroads of DC plans, other than as supplemental to DBs, have been relatively slight.