On June 21, 2022, the United States Department of Labor (“DOL”) published its Spring 2022 Regulatory Agenda – which lists all the regulations the DOL expects to have under active consideration. The Employee Benefits Security Administration (EBSA) items include 401(k) reform. I recommend 401(k) fiduciaries check them out to understand the DOL’s 401(k)-related priorities for the next 12 months.
Here are the three 401(k)-related priorities I am most excited about.
According to the agenda, “This rulemaking would amend the regulatory definition of the term fiduciary set forth at 29 CFR 2510.3-21(c) to more appropriately define when persons who render investment advice for a fee to employee benefit plans and IRAs are fiduciaries within the meaning of section 3(21) of ERISA and section 4975(e)(3) of the Internal Revenue Code.”
A proposal from the DOL is expected December 2022.
Here we go again. In 2016, the DOL enacted a fiduciary rule that expanded the ERISA definition of “fiduciary” to include all financial advisors that render 401(k) investment advice for a fee. In 2018, the Fifth Circuit struck down this rule. Today, only investment advisers must meet ERISA fiduciary standards, while other 401(k) financial advisors - generally brokers and insurance agents - do not.
This distinction is important because ERISA fiduciaries are obligated by law to give conflict-free investment advice – basically, impartial advice that puts the interests of the client first. In contrast, non-fiduciaries can give conflicted advice – basically, recommend high-commission investments over lower-cost alternatives - as long as certain disclosure and suitability standards are met.
The DOL’s new fiduciary rule is expected to expand the ERISA definition of “fiduciary” to include all 401(k) financial advisors - like the 2016 rule - while accounting for some more recent law changes. I welcome this reform. In my view, conflicted advice is the top cause of underperforming 401(k) investments – which I define as active funds that underperform comparable index funds over time, net of fees – today.
According to the agenda, “This regulatory action is part of a strategic project with the Internal Revenue Service and the Pension Benefit Guaranty Corporation to improve the Form 5500 Annual Return/Report of Employee Benefit Plan.”
A proposal from the DOL is expected March 2023.
To meet ERISA reporting requirements, “large” 401(k) plans (plans with more 100 participants) must file a Form 5500 annually, while most “small” plans must file a shorter Form 5500-SF. The Form 5500 series is supposed to help the government and other 401(k) stakeholders perform data-based research. For decades, the series has done a poor job at meeting this objective for two key reasons:
These 5500 shortcomings can make it impossible for 401(k) fiduciaries to properly “benchmark” their plan – basically, compare their 401(k) fees and investments to comparable plans on an apples-to-apples basis. Proper 401(k) benchmarking requires reliable comparison data. Such data isn't publicly available today because the Form 5500 doesn’t report it.
401(k) benchmarking serves an important purpose. It helps 401(k) fiduciaries avoid excessive fees and underperforming funds – issues that can make retirement dramatically less affordable than necessary for 401(k) participants. The process should be simple given its important purpose. That cannot happen until the Form 5500 series is reformed to report the necessary data.
According to the agenda, “This regulatory action is to explore ways to improve the effectiveness of retirement plan disclosures required under Title I of the Employee Retirement Income Security Act, balanced with the cost to plans and plan participants and beneficiaries of providing such disclosures.”
Stakeholder meetings regarding this reform were scheduled to begin June 2022.
401(k) plans must distribute certain information to participants from time to time to meet ERISA disclosure requirements. These requirements aim to equip participants with the information they need to make timely and informed decisions about their account. The problem – most participants don't read the disclosures they receive. I think that’s true (in part) for the following reasons:
Two 401(k) reforms can help. Streamline the number and content of required disclosures and simplify the safe harbor rules for distributing them to participants electronically.
In general, I am a fan of the 401(k) reforms on the latest DOL regulatory agenda. However, I would like to see the agency make it easier for 401(k) fiduciaries to protect their plan participants from underperforming funds and excessive fees – two of the top causes of 401(k) lawsuits today.
I think just two common sense 401(k) reforms – defining a “safe harbor” investment menu and banning “hidden” 401(k) fees – can go a long way in achieving this goal.
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