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Regulation and Compliance > Federal Regulation > DOL

Eye on Congress, the courts and regulators: 6 questions answered

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LifeHealthPro Senior Editor Warren S. Hersch recently interviewed Andrew Oringer, a New York-based attorney and co-chair of Dechert LLP’s Employee Benefits Group. The interview covered regulatory, legislative and legal developments being watched closely by the insurance and financial services industry. The following are excerpts.

Hersch: Tell me about the IRS audit program respecting the Internal Revenue Code section — 409A — governing non-qualified deferred compensation plans for highly paid executives. What are the implications of the audit program for advisors?

Oringer: Five years after finalizing the 409A rules in 2009, the IRS is shifting the focus of its audit program to compliance issue from interpretative positions. So they will be looking for mistakes in the drafting of the non-qualified plans, as opposed to disputing a taxpayer’s view as to how the rules may be applied.

That said, there are still unsettled questions under 409A, such as whether a short-term deferral of an executive’s compensation is subject to 409A. Disputes continue to arise, too, over whether plan distributions, the amount of compensation and the timing of deferral elections are 409A-compliant.

Hersch: Turning to the Department of Labor’s re-proposed fiduciary standard, what should advisors be watching out for if and when it’s released?

Oringer: The DOL has been dissatisfied for some years with its current definition of fiduciary under the Employment Retirement Income Security Act, or ERISA. Under the earlier proposal, the DOL opted not to tweak the definition, but to dramatically expand it to many more providers of investment advice.

As a result, the original proposal was met with extreme hostility by the financial services industry. The reaction was so strong that the DOL took the extremely unusual step of withdrawing the proposal in its entirety, but with an eye toward re-proposing it.

If a revised standard is planned for release, it will have to take place under the current administration — within the next six months — if it happens at all. A White House under a Republican president after the 2016 elections will not likely be amenable to a revised standard, at least not one anywhere near as strict as the original proposal.

If the DOL does re-propose under the current administration, all indications are that the definition of fiduciary will not be substantially narrower. An expanded definition will prompt some advisors to narrow their scope of services so as to avoid being labeled a fiduciary, but I don’t think there will be an exodus of financial professionals from the retirement plan market.

For those remaining, there will be increased costs in terms of both training and compliance with the new regulations. Additional costs will likely engender higher fees for clients. DOL regulators therefore need to be careful what they wish for, as they may wind up forcing the very consumers they’re trying to protect to pay more for investment advice.

Hersch: What are advisors to make of myRAs, the retirement savings program proposed by the Treasury Department in January of this year? How likely is it that Congress will pass the proposal?

Oringer: The myRA, a component of President Obama’s Opportunity for All plan, will be another piece of the retirement asset puzzle, albeit one with a low, fixed income investment return. Advisors will need to know how the myRA works, and how much of a client’s nest egg is invested in the vehicle, when developing retirement plan recommendations.

I do think it’s ironic that, at the same time the DOL is encouraging qualified plan participants to invest in a diverse portfolio — not just fixed income — so as to boost a plan participant’s investment yield, the Treasury Department is taking the opposing position with its myRA proposal. The administration is sending out mixed signals about how retirement assets should be invested.

Hersch: Why is the DOL opposed to fixed income vehicles?

Oringer: The DOL does not view fixed income/stable value vehicles as appropriate options for a qualified default investment alternative or QDIA, an employer’s default allocation used when a plan participant opts not to make an investment election. The DOL is concerned that these vehicles will not, by themselves, generate sufficient earnings over time to provide for an individual’s retirement.

When you use a qualified vehicle under QDIA rules, the fiduciary responsibilities governing the retirement account investments are low. So we’re basically talking about large amounts of money invested in an inferior portfolio — like the myRA. In my view, the positions of Treasury and the DOL on this issue are irreconcilable.

Hersch: Your pre-interview talking points references adjustments in benefit programs to recent same-sex marriage court rulings Can you elaborate?

Oringer: Existing qualified plan documents may not reflect new IRS rules indicating that same-sex marriage rules need to be respected under federal law. Other non-ERISA, non-qualified plans may be exempt from the new rules, notably in states that don’t recognize same-sex marriages. In these states, businesses should encourage employees to get advice about how to proceed with their beneficiary elections under the plans.

Hersch: I understand there have been judicial developments respecting qualified plan fees and company stock. Tell me about these?

Oringer: In cases where employees have a 401(k) plan invested in shares of their company, then they should be encouraged to get advice about whether, and how much, to maintain of the stock holding. As to excessive fees, some are hidden within revenue-sharing arrangements between the mutual fund companies and fund administrators. Advisors should expect continuing developments in this area, as well as one other: judicial rulings on whether a 401(k) provider of a menu of funds is a plan fiduciary.


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