In broad scope, the guidance issued in 2018 by the Department of Labor (DOL) under the Employee Retirement Income Security Act of 1974, as amended (ERISA), extended a trend established over the preceding five years, with one massive exception. The new ERISA fiduciary definition and related exemptions, which had commandeered DOL’s regulatory resources since 2010, was vacated by the Fifth Circuit in March 2018. DOL has yet to issue substantive guidance on the effect and consequence of that vacatur, although such guidance is widely expected to be issued later this year after the Securities and Exchange Commission completes its work on proposed Regulation Best Interest and related developments.
Otherwise, DOL continued in 2018 a very limited advance guidance program, with an output roughly comparable to that of 2017.
- DOL issued one Advisory Opinion (as compared to two in 2017) and two Field Assistance Bulletins (as compared to three in 2017).
- As in 2017, DOL did not issue any technical releases or interpretive bulletins.
- DOL issued nine individual exemptions from the ERISA prohibited transaction rules, up from seven in 2017.
This trend of limited guidance dates to at least 2013 and thus cannot be wholly attributed to the regulatory proclivities (or lack thereof) of the current Administration. For a variety of reasons, DOL has simply become less engaged in delivering advance guidance to the regulated community.
DOL issued just one Advisory Opinion in 2018, to Retirement Clearinghouse, LLC, regarding its “auto-portability program” designed to assist individuals in consolidating small retirement accounts from prior jobs into their new employer’s 401(k) plan through a structured system of transfers of amounts held in prior plans to a default IRA and automatic rollover into a new employer’s plan when the individual is re-employed. See our commentary on the Advisory Opinion, which is quite fact-specific. DOL also issued a notice of proposed exemption that would resolve certain prohibited transaction issues raised by this specific program, together with a news release asking for comments on auto-portability, and thus appears to have some appetite to provide further guidance on this topic. Auto-portability offers a means to advance the important policy goal of preserving and improving the efficiency of retirement savings, which may account for DOL’s willingness to engage on this issue (which DOL had not previously addressed).
Field Assistance Bulletins
DOL issued two new Field Assistance Bulletins (FABs) in 2018.
- FAB 2018-01, issued on April 23, 2018, returned to the perennial issue of environmental, social, and governance factors for ERISA plan investments through “clarifications” on prior fiduciary guidance on those factors (Interpretive Bulletin 2016-01 and Interpretive Bulletin 2015-01) in connection with proxy voting and an ERISA plan’s exercise of shareholder rights. DOL has in one form or another spoken to these matters in seven consecutive Presidencies.
- FAB 2018-02, issued on May 7, 2018, provided a temporary enforcement policy for the vacated fiduciary rule and stated that from June 9, 2017, until “after regulations or exemptions or other administrative guidance has been issued,” the DOL would not pursue prohibited transaction claims against investment advice fiduciaries, provided that the investment advice fiduciaries were working in good faith to comply with the impartial conduct standards.
Prohibited Transaction Exemptions
The DOL is authorized to grant a conditional or unconditional exemption for an otherwise prohibited transaction if it determines that the exemption is: (1) administratively feasible; (2) in the interests of the plan and of its participants and beneficiaries; and (3) protective of the rights of plan participants and beneficiaries. The DOL issued nine individual prohibited transaction exemptions (PTEs) in 2018, an output comparable to that in recent years—seven in 2017, ten in 2016, and nine in 2015.
PTE 2018-02 provided relief for an in-house asset manager who no longer qualified as a Registered Investment Advisor, rendering PTE 96-23 (the “INHAM” exemption) unavailable. The exemption allowed transactions between ERISA-covered plans maintained by Liberty Mutual or one of its affiliates. There were multiple conditions on the grant, including that the asset manager has full fiduciary responsibility regarding plan assets involved in the transactions and that the asset manager complies with the vacated Best Interest Contract Exemption’s requirements to act in the best interest of the plan and to make no materially misleading statements regarding its relationship to the plan.
PTE 2018-03 replaced PTE 2015-17, which permitted the purchase and sale by Frank Russell Company (Russell) plans of affiliated mutual funds, directly or through Russell’s collective investment funds. Russell acted as both a plan fiduciary and mutual fund advisor. PTE 2015-17 required fee offsets to prevent double commissions for the investment of plan assets in mutual fund shares, which PTE 2018-03 revised to permit a Russell investment manager to receive fees from affiliated mutual funds related to investments made by the plans. Another PTE issued in 2018, PTE 2018-09, similarly permitted the receipt of fees from a mutual fund for investment advice connected to share investments made by an employee benefit plan.
In addition to the PTEs outlined above, the DOL also issued the following PTEs on familiar fact patterns:
- PTE 2018-01 allowed the purchase and holding of contingent value rights by the retirement plan of Health Management Associates, Inc. (HMA), as part of a merger between HMA and FWCT-2 Acquisition Corporation.
- PTE 2018-04 permitted Toledo Electrical Joint Apprenticeship & Training Fund to purchase real property from its sponsoring union.
- PTE 2018-05 and PTE 2018-08 allowed for the acquisition and holding of subscription rights by individually directed accounts of plan participants in connection with an offering by the plan sponsor. PTE 2018-05 was granted to EXCO Resources, Inc.’s 401(k) Plan, and PTE 2018-08 was granted to Liberty Media’s 401(k) Savings Plan.
- PTE 2018-06 permitted the sale by The Grossberg, Fox & Beyda LLP Profit Sharing Plan of an interest in a limited liability company that will be owned by the partners of the plan sponsor.
- Under PTE 2018-07, BNP Paribas, S.A., joined five corporations that were granted PTEs in 2017 permitting the activities of qualified professional asset managers (QPAMs) despite foreign criminal convictions (usually of affiliates) unrelated to QPAM activities.
In a departure from past practice, however, in 2018 DOL did not authorize any otherwise prohibited transactions under its Expedited Exemption Procedure (ExPro), for the first time since the 1997 launch of that program. (An ExPro exemption was finalized in January 2019.) Recent practice suggests that DOL is largely limiting the functional availability of ExPro, which under the procedure rests in DOL’s discretion, to more resource-constrained applicants. Also, as the number of individual exemptions continues to decline—an ExPro application must be based on at least one PTE issued in the past 120 months—the opportunity to invoke ExPro also will diminish.