In April, I wrote that the “hot” issues on my desk for the first quarter were: the prospect of the DOL’s fiduciary proposal; allocation of revenue sharing in 401(k) plans; and capturing of rollovers from retirement plans.

Those continued to be the top issues in the second quarter. In fact, two of the issues “merged” in the sense that the hottest issue in the fiduciary proposal is distributions from retirement plans and the capturing of rollovers.

With that in mind, here is a brief description of the hot issues in the second quarter:

  • By the end of June, most people were at least generally familiar with the fiduciary “package,” including the proposal to expand the definition of fiduciary advice and the two prohibited transaction exemptions that apply to the “sales” process. With the July 21 deadline for comments rapidly approaching, the work shifted from education to the preparation of comment letters. Generally stated, that work fell into three categories:
    • Requests for clarifying and limiting the definition of fiduciary advice. For example, the proposal says that a recommendation specifically directed to a person could be fiduciary advice. In theory, that could be a general mailing to thousands of people, but with each letter having a specific addressee. I can’t imagine that the DOL intends for it to be that broad. So, that will likely be limited or, at least, clarified so that only includes specific, rather than general, recommendations. There will likely be some changes to the fiduciary definition, but the final version will probably be much the same as the proposal. So, expect most sales practices to fall under the fiduciary advice definition.
    • Comments to clarify Prohibited Transaction Class Exemption 84-24. These comments are primarily for clarification of some of the conditions. This exemption applies to insurance products that are sold to plans and IRAs (other than individual variable annuities that are sold to IRAs, which are under the Best Interest Contract Exemption, BICE, see below). While the DOL will probably modify and clarify 84-24, it is unlikely that major changes will be made to this exemption.
    • Comments requesting material changes to the Best Interest Contract Exemption. This proposed exemption applies to all other sales and recommendations. The DOL is likely to make significant concessions in its re-write and finalization of this exemption, particularly regarding financial disclosures.

Note that, though, for large plans, there is a sales “carve-out” from the fiduciary rule. However, for small plans, there is not. In other words, for small plans, sales would generally be considered to be fiduciary advice.

Also BICE only applies to certain transparent and/or highly regulated investments, such as mutual funds, bank deposits and insurance contracts. In other words, sales of other investments, such as private equity funds and hedge funds do not have an exemption and, thus, can only be recommended where compensation to the adviser, the adviser’s financial institution, and all affiliated entities is level. That virtually eliminates recommendations of proprietary products of those types.

  • With regard to revenue sharing, the current issue is whether or not it should be “levelized” or “equalized.” Simply stated, the issue is whether the revenue sharing (such as 12b-1 fees and subtransfer agency fees) that is generated by a particular mutual fund should be allocated back to the participants who own that mutual fund. The fundamental question is whether it is fair, or even prudent, for some participants to be invested in high expense funds that pay revenue sharing, while others are lower expense fund that do not pay revenue sharing . . . and the cost of the plan is either entirely or largely borne by the revenue sharing. In other words, is it equitable for a subset of participants to be charged for all or substantially all of the cost of operating a plan . . . through the revenue sharing that their investments generate . . . and through the additional expense that supports those payments? Some providers and plan sponsors have decided that it is not.

Those are the key issues that were on my desk in the second quarter. In the Fall, we will look at the hot issues for the third quarter.