Benefits Industry Balks at Exemption Changes Sought by DOL

Retirement plan sponsors and others are mobilizing against sweeping changes the U.S. Labor Department has proposed to how companies apply for and receive individual exemptions from laws governing banned transactions.

At issue are modifications the department’s Employee Benefits Security Administration wants to make to the way it processes legal exemption requests. EBSA is responsible for protecting pension, health, and other benefits for more than 150 million participants and beneficiaries in private-sector employee benefit plans that can be abused by employers or be the subject of fraud.

Critics say the proposed rule flips the long-time script used to design cost-efficient plans that protect sponsors and beneficiaries, stifling plan development and restricting the conduct of plan operators.

Laws governing employee benefit plan transactions are intentionally broad, underscoring the important role the exemption process plays, according to stakeholders.

“The department is almost discouraging people from applying for exemptions, even though exemptions are supposed to be a normal part of the regulatory process,” said Chantel Sheaks, vice president for retirement policy at the U.S. Chamber of Commerce.

The Employee Retirement Income Security Act of 1974 (Pub.L. 93-406) bars retirement plan officials, called fiduciaries, from using plan assets to self-deal or transact with people who have a stake in a plan’s outcome. But when such a transaction would be in the best interest of plan participants and beneficiaries, plans can apply for case-by-case exemptions.

The department’s proposed changes could make it harder to get exemptions by applying tougher criteria to the types of independent service providers plans can hire and force plans to apply a stringent “best interest” standard to exempted transactions.

“Most of the time, when you think of something procedural, it means an application process—an X number of days to apply or that you need to provide a certain number or type of documents to make your case,” Sheaks said. “This is a lot broader than that. It would fundamentally change these exemptions.”

Growing Smaller

So far, an alliance of 16 employee benefits and financial security industry trade groups formed to oppose the proposed changes, including the Chamber of Commerce, has convinced regulators to extend the comment period on the proposal by 45 days, through May 29.

“After carefully considering the extension requests, the department decided that it is appropriate to extend the public comment period to a total of 75 days,” said Acting Assistant Secretary for Employee Benefits Security Ali Khawar.

Now, stakeholders are trying to get the department to reevaluate its determination that the proposal isn’t “economically significant,” meaning it could take effect more quickly and without White House review.

But part of the reason the department has determined that the rule isn’t significant is because—without any rule change—it’s been gradually reducing the number of individual exemptions it grants, said Michael Kreps, principal and co-chair of the retirement services practice at Groom Law Group Chartered in Washington.

A Bloomberg Law analysis of DOL data shows the number of granted exemptions has fallen 97% over two decades—from 77 individual and expedited exemptions granted in 2002 to just three approved last year, and two granted in 2020.

Although the number of applications for relief has also declined, that’s not because of waning need, Kreps said.

“Attorneys are less likely to recommend exemptions they don’t think they’ll get,” he said. “If they impose these changes to the application process, that will significantly reduce the number of applications they receive even more. They’re trying to use that lower number of applications for the justification of this rule.”

Labor Department spokesman Grant Vaught said EBSA has used limited resources to issue class exemptions and regulations, instead of making case-by-case decisions. Class exemptions carve out permanent protections for practitioners as long as they meet the criteria of a certain class of plan or service provider identified in the exemption.

DOL data show one class exemption was approved in the past 15 years, however.

Consumer Protections

One proposed change stakeholders oppose would modify the percentage-of-revenue test that determines whether an appraiser or hired fiduciary can qualify as independent. Current rules, approved in 2011, allow service providers to make as much as 5% of revenue from a plan. But the department wants to cap it at 2%.

That threatens to undermine smaller companies and force a monopoly in an already small, specialized market, said Kreps.

Critics say another proposed change—applying a baseline “best interest” standard of conduct on fiduciaries using transactionary exemptive relief—would place additional, costly burdens on plans to prove they meet the new standard. Current review procedures don’t specify any presumed conduct standard for exemptive relief.

The best interest standard has prompted debate ever since the department tried to broaden its definition of fiduciary advice in 2016. Since then, DOL has been incrementally broadening the application of a best interest standard through subregulatory advice, even while pledging to revisit the definition.

But DOL isn’t only the arbiter of exemptions under employee benefits law. Individual retirement accounts offered by banks or insurance companies must also seek their exemptions from the DOL in the wake of a restructuring of the regulatory process in 1978. That means IRA providers who have never been held to the best interest standard would be required to do so as a prerequisite to qualify for exemptions, said Kreps.

Not everyone buys that argument. Benefits attorneys always cry foul when the regulators are tightening consumer protections, said David Certner, legislative counsel and the director of legislative policy at AARP.

The number of exemptions approved—and the costs they impose on plan sponsors—are factors guided by one question, said Certner: What does it takes to ensure workers and their families are protected?

“I’m not too concerned about the costs here if, at the end of the day, we’re doing something that’s in the best interest of plan participants and their beneficiaries,” Certner said.

Vaught, the DOL spokesman, said one of the main objectives of the proposal is to ensure exemption applicants are providing sufficient information as required by ERISA. Public comments will help regulators determine if the changes are feasible and will protect the interests of benefit plan participants, he said.

“The Department is proposing to amend its exemption procedure to provide more clarity, certainty, and transparency in the exemption application process,” he said in a statement.