Department of Labor Issues New Proposed Fiduciary Regulations

On April 14, 2015, the U.S. Department of Labor (DOL) reissued long-anticipated proposed "fiduciary" regulations. The new proposed regulations replace the original proposed regulations issued five years ago, which were withdrawn by the DOL after heavy criticism by financial institutions, lawmakers and other stakeholders. The regulations, once finalized, are expected to significantly impact the financial services industry and the products and services they provide to retirement plan sponsors, participants and individual retirement account or annuity (IRA) holders.  

1. Definition of "fiduciary"  

The new proposed regulations revise the definition of fiduciary, and greatly expand the types of advice and advisor relationships that are covered by the term. Under the proposed regulations, "investment advice" can include, among other things: (i) recommendations that a participant take a distribution of plan assets, (ii) recommendations as to the management of plan investments, (iii) appraisals of plan investments and (iv) recommendations regarding the selection of investment advisors (such as in connection with an RFP for an investment advisor). Any individual who receives compensation for providing advice pursuant to an agreement or understanding that the advice is individualized or specifically directed to the recipient for consideration in making investment decisions regarding plan assets may be considered a fiduciary, unless an exception applies. Notably, the regulations reflect an expansion of the DOL's view of what constitutes "advice" as opposed to "education."  

2. New prohibited transaction exemptions  

In light of the expanded universe of fiduciaries, the DOL has introduced two new proposed prohibited transaction exemptions intended to exempt fiduciary advisers from conflicts of interest inherent in certain transactions.  

One exemption exempts advisers who are paid for providing investment advice to individual plan participants, IRA investors and small "plans" and who are also compensated by the providers of the investment products the advisers recommend, if they use a "best interest contract." To be eligible for the exemption, retirement investment advisers must formally acknowledge their fiduciary status and enter into a contract with their customers in which they commit that they will put the customer's interest first and disclose all conflicts of interest relating to the investments they recommend and their compensation. According to the DOL, the "best interest contract" exemption represents "a new approach to exemptions that is broad, flexible, principles-based and can adapt to evolving business practices."  

Another exemption is available for plan fiduciaries who serve as principals in certain fixed income security transactions with plans and IRAs.  

3. Amendments to existing prohibited transaction exemptions  

Lastly, the DOL proposed amendments to several commonly-used prohibited transaction exemptions, including 75-1, 77-4, 80-83, 83-1, 84-24 and 86-128.  

Plan Sponsor Action: Under the approach set forth in the new proposed regulations, plan sponsors will need to understand the documentation and disclosures that they should be receiving from their fiduciary advisors. In addition, plan sponsors will need to review their investment educational materials and make any revisions necessary to ensure that they are not viewed as providing investment advice.

Changes to Employee Plans Compliance Resolution System (EPCRS)

The Internal Revenue Service (IRS) recently released a pair of revenue procedures which modified the EPCRS for sponsors of 401(k) and other types of qualified plans, 403(b) plans, and certain other tax-deferred plans. Revenue Procedure (Rev. Proc.) 2015-27 released on March 27, 2015, modifies the EPCRS as set forth under Rev. Proc. 2013-12 as follows:

  • Compliance fees under the voluntary correction program (VCP) are reduced for failures to meet the requirements of Section 72(p) of the Internal Revenue Code with respect to participant loans;
  • Compliance fees under VCP are also reduced for failures to satisfy the requirements of Section 401(a)(9) of the Internal Revenue Code related to required minimum distributions (RMDs) for errors involving less than 300 affected participants; and
  • Plan sponsors do not have to ask for the return of certain overpayments to terminated vested participants and retirees and may correct these failures in other ways.

The IRS also released Rev. Proc. 2015-28 on April 2, 2015, which provides liberalized correction methods for certain elective deferral failures:

  • Subject to certain notice and timing conditions, no corrective qualified non elective contribution (QNEC) is required if an employee's improper exclusion from automatic enrollment under a section 401(k) or 403(b) plan is corrected within 9½months after the year of the failure or if an elective deferral failure lasted for less than three months; and
  • Subject to certain notice and timing conditions, reduced QNEC of 25%, instead of 50%, are allowed for failures to correctly implement elective deferral elections in a 401(k) or 403(b) plan.

Plan Sponsor Action: Elective deferral and automatic contribution errors are common. When errors are identified, plan sponsors should contact Venable's Employee Benefits Practice Group to determine if they are eligible for the reduced fees or the new relief.

Section 162(m) Final Regulations  

On March 31, 2015, the IRS issued final regulations under Section 162(m) to clarify that:

  • For stock options and stock appreciation rights to automatically qualify as "performance-based compensation," the plan must specify, and shareholders must approve, the maximum number of shares with respect to which awards may be made to an individual employee within a specified period. For this purpose, the maximum may refer to all types of equity awards, not only stock options and stock appreciation rights.
  • Effective for grants on or after April 1, 2015, the IPO transition rule, under which awards granted during the transitional period will qualify as "performance-based compensation" even if exercised or vested after the transitional period, applies only to stock options, stock appreciation rights and restricted stock, not to restricted stock units or phantom stock.

Plan Sponsor Action: Plan sponsors should verify that their equity plans intended to provide exempt "performance-based compensation" under Section 162(m) contain a per-employee grant limit that is compliant with the final regulations. Additionally, any plan sponsor relying on the IPO transition rule needs to be aware of the new limitation noted above.