By Pension and Benefits Editorial Staff
The incoming Biden Administration may be focused on legislation designed to provide continuing relief from the economic impacts of the COVID-19. The Departments of Labor and Treasury will also continue to provide guidance implementing the retirement plan provisions of the SECURE Act and the CARES Act. However, a Biden Administration can be expected to address, if not reverse, certain high profile regulatory initiatives of the Trump Administration.
Private equity investments as designated investment alternatives in 401(k) plans. The DOL issued an information letter on June 3, 2020 authorizing the inclusion of private equity investments within professionally managed asset allocation funds that are designated investment alternatives for participant-directed individual account plans.The DOL further advised that a plan fiduciary would not violate its duties under ERISA solely because the plan offers a professionally managed asset allocation fund with a private equity component as a designated investment alternative for an ERISA covered individual account plan.
The DOL views allowing private equity funds to be made available as an allocation option may enable plan participants to diversify their accounts and increase assets, while also providing private equity funds access to the estimated $6-$8 trillion invested in 401(k), 403(b), and 457(b) plans. However, private equity funds have been criticized as being too high risk and costly to be included in retirement funds. The DOL view could be modified or reversed in a Biden Administration.
Economically targeted investments (ETIs). Economically targeted investments that are selected for the collateral benefits they create, apart from the investment return provided to the employee benefit plan investor, were not viewed under the Obama Administration as incompatible with ERISA’s fiduciary standards. In a reversal of a position maintained during the Bush Administration, the Obama DOL held that if a fiduciary properly determined that an investment was appropriate based solely on economic considerations, including those that may derive from environmental, social, and governance (ESG) factors, the fiduciary could make the investment without regard to any collateral benefits the investment may also promote.
The Trump DOL unsurprisingly reversed course with respect to ESG investments. In final regulations, effective January 12, 2021, the DOL stresses that ERISA fiduciaries must evaluate investments and investment courses of action based solely on pecuniary factors—financial considerations that have a material effect on the risk and/or return of an investment based on appropriate investment horizons consistent with the plan’s investment objectives and funding policy. The final regulations expressly apply these principles not just to investments and investment courses of action, but also to the selection of available investment options for plan participants in individual account plans.
Significantly, the final regulations expressly state that compliance with ERISA’s duty of loyalty prohibits fiduciaries from subordinating the interests of participants to unrelated objectives. Accordingly, fiduciaries are barred from sacrificing investment returns or taking on additional investment risk to promote non-pecuniary goals.
The rules restricting ESG investments would be a prime candidate for revision by the incoming Biden Administration. The rules conflict with the promised environmental agenda of the incoming Administration, which focuses on promotion of sustainable energy rather than fossil fuels. In addition, fiduciaries can argue that ESG focused funds have been consistent performers.
Fiduciary rule. The DOL, during the Obama Administration, issued final rules that would have expanded the definition of a fiduciary to include any individual receiving compensation for providing advice (whether or not provided on a regular basis or as the primary basis for an investment decision) that was individualized or specifically directed to a particular plan sponsor (e.g., an employer maintaining a retirement plan), plan participant, or IRA owner for consideration in making a retirement investment decision. Under the amended rules, any investment recommendation would have been subject to ERISA’s fiduciary requirements even if it was not the product of a mutual understanding or provided on a regular basis (i.e., more than once) as the primary basis for an investment decision. The rules were subsequently vacated by the Fifth Circuit Court of Appeals (with the acquiescence of the Trump Administration), effectively reinstating ERISA’s 5-part test for determining fiduciary status.
The DOL recently released a proposed exemption that would allow financial institutions (registered investment advisers, broker-dealers, banks, and insurance companies) and investment professionals (their individual employees, agents, and representatives) to receive a wide variety of payments that would otherwise violate the prohibited transaction rules, including, but not limited to, commissions, 12b-1 fees, trailing commissions, sales loads, mark-ups and mark-downs, and revenue sharing payments from investment providers or third parties. The proposed exemption’s relief would extend to prohibited transactions arising as a result of investment advice to roll over assets from a plan to an IRA, and would allow financial institutions to engage in principal transactions with plans and IRAs in which the financial institution purchases or sells certain investments from its own account. However, the proposed exemptive relief would be conditioned on compliance with impartial conduct standards that generally align with a SEC best interest rule that applies to broker-dealers and investment advisers.
The DOL proposed rules would allow financial professionals to avoid fiduciary obligations in executing certain transactions. However, studies have indicated that financial service companies have modified sales and marketing practices to accommodate many of the requirements under the proposed rules. A Biden Administration may not want to incur the heavy lift of going through the long process of reinstating the prior rules. However, it would be reasonable for a Labor Department under new management to revisit the proposed rules to make them tougher on, for example, insurance agents and other financial service professionals who advise plan participants on the rollover of 401(k) assets to certain annuity products.
Legislation. In addition to pandemic relief legislation introduced late in 2020, The Securing a Strong Retirement Act of 2020 contains many provisions that could be included in future legislation promoted under a Biden Administration. Among such provisions are: an expansion of automatic enrollment in 401(k) and other retirement plans; an increased credit for small employer pension plan startup costs; an increase in the required minimum distribution age from 72 to 75; an exemption from the RMD rules for 75-year-old participants with account balances of not more than $100,000; an increase in the maximum catch-up contribution by 60-year-old employees (to $10,000 from $5,000); treatment of student loan payments as elective deferrals for purposes of matching contributions; and a one-year reduction in the period of service requirement for long-term, part-time employees.
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