Recent DOL Actions of Significance to DC Plans
Wednesday, July 8, 2020
Posted by: Karen Witham
DCIIA member Mike Barry provided DCIIA with the following overview of recent DOL actions
Proposed class PTE on fiduciary advice
On June 29, 2020, the DOL released a proposed class Prohibited Transaction Exemption (PTE) for advice fiduciaries. The proposed PTE would retain the five-part test (under a DOL regulation issued in 1975) for who is an “investment advice fiduciary,” but the PTE includes an extensive “interpretation” of that test that in many ways broadens it beyond prior law and practice and articulates principles for its application to plan-to-IRA rollovers. The proposal conditions relief on compliance with the Impartial Conduct Standards, requires acknowledgment of fiduciary status, and a written description of services and material conflicts of interest. Affected financial institutions must “adopt policies and procedures prudently designed to ensure compliance” and produce a written compliance report that would be signed by the CEO, who would also certify compliance. Enforcement of violations of these rules would be under ERISA’s and the Internal Revenue Code’s prohibited transaction provisions.
Proposed regulation on ESG investments
On June 24, 2020, the DOL released a proposed amendment to regulations under ERISA section 404(a), providing regulatory guidance with respect to fiduciary decisions to invest plan assets based on environmental, social, and corporate governance (ESG) factors or in ESG-themed funds. With respect to defined benefit plans and designated investment alternatives (DIAs) in participant-directed DC plans consideration of “non-pecuniary” issues would be prohibited and tighter rules for the documentation of consideration of ESG factors as part of a “tie-breaker/all things similar” analysis would be required. The proposal would also prohibit the use of ESG funds in a qualified default investment alternative (QDIA), e.g., a 401(k) plan’s default target date fund.
Letter OK-ing private equity in DC plans, in certain circumstances
On June 3, 2020, the DOL issued an information letter on private equity (PE) investments in a DIA in a participant-directed DC plan. The letter states that, while not prohibited by ERISA, inclusion of PE investments in participant-directed DC plans does present special issues. DC fiduciaries considering a PE investment should consider whether: the fund offers the opportunity to diversify investments; the fund is competently managed; participant investments in the fund are appropriately limited; and the fund aligns with plan and participant interests/needs.
Final electronic participant communications safe harbor
On May 21, 2020, the DOL released a final regulation amending current disclosure rules, providing a new “notice and access” safe harbor for the use of electronic communications to satisfy required participant disclosures in retirement plans. Under the new rule, generally all required retirement plan-related communications (other than those provided only upon request) may be posted to a website, provided the affected individual receives a notice at his “electronic address” directing him to the website and has the right to request a paper copy or opt out of the electronic communications program. Disclosure may also be made (subject to similar rules) directly via email.