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Melanie Waddell

Regulation and Compliance > Federal Regulation

IRA Rollover 'Tsunami' Worries Ex-DOL Official

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What You Need to Know

  • IRAs lack consumer protections and should be regulated by ERISA, former EBSA head Phyllis Borzi says.
  • Preston Rutledge, another former DOL official, says policymakers need to focus on the decumulation phase.
  • Borzi and Rutledge agreed that state IRA plans have been a success.

What keeps Phyllis Borzi, former head of Labor’s Employee Benefits Security Administration, up at night?

“We are in the midst of a tsunami exit of assets from DC plans into the unregulated world of IRAs,” Borzi declared at recent event in Washington to celebrate the 50th anniversary of the Employee Retirement Income Security Act.

Borzi was on tap along with Preston Rutledge, former head of EBSA in the Trump administration, at the event to discuss the state of the retirement planning marketplace.

Borzi said that if she could make one change to ERISA, it would be to put IRAs under the full protection of the law.

Rollovers of DC plan asset to IRAs climbed from nearly $473 billion in 2015 to $618 billion in 2020, according to the Employee Benefit Research Institute.

Chart: EBRI

I asked Borzi if the Labor Department’s new fiduciary rule was an attempt to do just that. She responded in an email that Labor’s rule ”only addresses one situation within ERISA’s broad fiduciary duty requirements — when the person is providing advice to an individual or plan for a fee.”

Said Borzi: “There are many other aspects of plan administration and management and ERISA consumer protections that are not applicable to entities covered by the law,” such as spousal benefits in ERISA.

“It’s the lack of consumer protections that most concern me, but rather than create an entirely new regulatory scheme, it seems more efficient to take ERISA’s current framework and adapt it” to regulate IRAs, Borzi said.

Living in a DC World

Rutledge stated that “For better or worse, we live in a DC world,” and that “one way or another we need to make these DC plans ‘true retirement plans.’” Borzi agreed.

Going forward, policymakers will need to “focus significant attention on the decumulation phase” of retirement, Rutledge said in an email after his remarks.

One success story, both agreed: state IRA plans. “Keep your eye on that,” Rutledge said.

These plans are “the only thing that has improved coverage,” Borzi added.

Rutledge reminded attendees that Rep. Richard Neal, D-Mass., reintroduced his auto-IRA bill earlier this year.

Neal’s Automatic IRA Act of 2024 would require businesses with 10 or more employees to offer a workplace retirement plan.

These employers would be required to automatically enroll all full-time and long-term part-time employees in an automatic IRA or similar plan like a 401(k) plan. Workers could decline to participate or drop out at any time after enrollment.

Neal has been fighting for auto-IRAs since the plan was dropped from the Secure 2.0 Act.

DOL Rule Compliance — What’s Still in Effect

Industry attorneys have also been reminding advisors what’s still required since the two Texas courts halted Labor’s new fiduciary rule.

The 2020 version of PTE 2020-02 on rollover advice, is still in effect, ERISA attorney Fred Reish, partner at Faegre Drinker, told me in a recent email.

“The amended version — adopted this year and to be effective on Sept. 23 — was stayed. The two versions are similar, but not identical,” Reish said.

Further, “the original, and much less demanding, version of PTE 84-24 [dealing with annuity advice] is still in effect,” Reish said. “But the amended, and much more demanding (and similar to 2020-02 in some ways), version,” which was also to be effective Sept. 23, has been stayed.

The amended PTEs “are stayed pending the trials and any appeals,” Reish noted.

With the court orders, the current standard for determining whether a financial professional is acting as a fiduciary under ERISA and the Internal Revenue Code in connection with providing nondiscretionary advice remains the five-part test from the DOL’s 1975 regulation, attorneys at K&L Gates noted in a recent alert.

“A financial professional that is an ERISA fiduciary engages in a prohibited transaction if the financial professional uses its fiduciary authority to generate additional fees for itself or a person in whom the financial professional has an interest that may affect its best judgment as a fiduciary (e.g., an affiliate), unless a PTE applies,” the attorneys state.

“For example, advice to rollover a 401(k) account to an IRA managed by the advice provider would likely be prohibited unless the advice is structured to comply with an applicable PTE,” the alert states.

To address this risk, many financial professionals rely on PTE 2020-02.

The fiduciary rule “would have amended the exemption’s conditions. Because of the court orders, parties relying on PTE 2020-02 should continue to comply with the current (non-amended) version of PTE 2020-02,” the K&L Gates attorneys agreed.


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