There is much to be considered under the new set fiduciary rules recently proposed by the DOL, especially as we sort through the (very extensive) details of this new regulatory regime. We are already hearing much about the impact and change which would be introduced into the market over the expansive reach of this new program, and there is little doubt that we will see litigation related to it all.

However, regardless of what your position may be with regard to the efficacy or appropriateness of these changes, there are a few striking characteristics regarding these new proposals which will, I believe, “inform” many of the discussions-pro and con-which we are going to see.

• The first is the DOL’s discussion regarding the driving policy behind these changes of which, I suspect, you may not see much mention.  The focus will likely be, instead, on the rules’ details. Nonetheless, consider the following (found in the fiduciary proposed regs’ preamble): 

Since 1975, the retirement plan landscape has changed significantly, with a shift from defined benefit plans (in which decisions regarding investment of plan assets are primarily made by professional asset managers) to defined contribution/individual account plans such as 401(k) plans (in which decisions regarding investment of plan assets are often made by plan participants themselves). In 1975, IRAs had only recently been created (by ERISA itself), and 401(k) plans did not yet exist. Retirement assets were principally held in pension funds controlled by large employers and professional money managers. Now, IRAs and participant-directed plans, such as 401(k) plans, have become more common retirement vehicles as opposed to traditional pension plans, and rollovers of employee benefit plan assets to IRAs are commonplace. Individuals, regardless of their financial literacy, have thus become increasingly responsible for their own retirement savings.

The shift toward individual control over retirement investing (and the associated shift of risk to individuals) has been accompanied by a dramatic increase in the variety and complexity of financial products and services, which has widened the information gap between investment advice providers and their clients. Plan participants and other retirement investors may be unable to assess the quality of the advice they receive or be aware of and guard against the investment advice provider’s conflicts of interest. However, as a result of the five-part test in the 1975 rule, many investment professionals, consultants, and financial advisers have no obligation to adhere to the fiduciary standards in Title I of ERISA or to the prohibited transaction rules, despite the critical role they play in guiding plan and IRA investments.

I think few will disagree with this state of affairs, and it should be kept in mind as we discuss whether and how appropriate were the balances that have been struck.

• This public policy seems to be serving as the basis  for proposing an approach to dealing with the growing practice of providing  lifetime income programs under defined contribution plans. These new rules recognize that lifetime income programs can be sophisticated and use annuities for which there is limited understanding in the market, and attempt to address those concerns. As noted above, where employers under DB plans were at the forefront of the fiduciary reviews of the provision of lifetime income, much of this now falls to the individual. The sponsor, however, is not off the hook, either, as these changes include the  serious regulation of the business practices related to “holy grail” of lifetime income-the sponsor’s choices which impact the portability of the guarantees which may be accumulated under a plan. 

• Associated with this is the absolute need to now pay close attention to the IRA rules, upon which the DOL seems focused.  IRAs, in their various iterations are critical to the portability of income guarantees accumulated under DC retirement plans. These DOL proposals have a much more dramatic impact on IRAs than on retirement plans themselves, and there may be a tendency to not pay close attention to them if your focus is on the plan market. This would be a mistake, as the IRA changes may impact what a fiduciary may choose to do in its own plan-based lifetime income program.

• The obscure has become prominent. It is necessary take note of the changes to an almost cryptic Prohibited Transaction Exemption, PTE 84-24: the proposed amendment speaks worlds of the changes to come. This exemption had previously allowed (among other things) the payment of commissions on the annuity contracts  purchased by a plan under which lifetime guarantees are provided. That prior PTE simply required notice and approval of  the commissions to and from the plan’s independent fiduciary. The changes-and their discussion-fill 91 pages, would dramatically change that, imposing PTE 2020-02 rules on commission payments. The new rule will, among other things, generally remove 84-24’s use to enable the payment of commissions paid on the purchase of annuity guarantees by ERISA covered retirement plans. So, again, for those involved in lifetime income programs, there is a serious need to pay close attention to the massive shifts implemented by this change. Whether or not you agree with the choices the DOL has made, it seems to be consistent with its stated policy goals.

• Finally, you may also want to pay attention to the changing rules on “robo-advice.” Technology is critical to the successful operations of lifetime income programs, and the DOL is tackling that challenge in some very important and notable ways which seem, again, to be consistent with its stated policy goals.

The finalization of these new rules effectively establishes a new regulatory regime. There is much to which to pay attention.