Big Banks Rethink Legal Route to 401(k) Management With New Rule

The US Labor Department’s newly amended exemption to federal benefits law allowing asset managers to oversee workplace retirement funds imposes stricter disclosure and recordkeeping requirements that will prompt some Wall Street firms to weigh alternatives.

Retirement savers’ money in employer-sponsored plans has long been entrusted to asset managers who operate under the class exemption, which as of Monday carries higher net-worth and assets-under-management conditions and calls for all companies to amend their contracts with plans.

The updated qualified professional asset manager (QPAM) prohibited transaction exemption standards, now in effect, also make it harder for institutions that have faced foreign criminal charges to oversee 401(k) assets.

Major asset managers including UBS Group AG, JPMorgan Chase & Co., and Deutsche Bank AG have already sought individual QPAM exemptions because of foreign criminal convictions since the amended class exemption was proposed.

Pushback from Wall Street banks and Republican lawmakers around the rule that was released as a draft in 2022 included claims that it would be more onerous and expensive for asset managers and hurt retirement savers. But the heightened requirements to claim a QPAM exemption would require more disclosures to the employer plans, helping DOL’s Employee Benefits Security Administration with regulatory enforcement, proponents have said.

“This modest notice requirement gives the Department a better sense of the number and identity of investment managers that are relying on the exemption,” a DOL spokesman said in an emailed statement. “Understanding the size and nature of the institutions using the QPAM exemption is important to the proper discharge of the Department’s oversight responsibilities with respect to the retirement market.”

The Employee Retirement Income Security Act broadly holds that most financial services firms and service providers working with retirement plans could have a conflict of interest in that relationship. They therefore must secure a prohibited transaction exemption, such as a QPAM exemption, from the DOL to transact with plan assets.

Compliance ‘Gold Standard’

Benefits advisers have said that more stringent standards under the amended QPAM rule could prompt fund managers to seek other exemptions under ERISA, which would in turn pass costs on to plans and participants in the form of higher fees and fewer choices.

“The QPAM exemption has long been noted as the gold standard in ERISA compliance,” said Erica Rozow, partner at Simpson Thacher & Bartlett LLP. “Without a doubt, these amendments have made it more likely that an entity will be disqualified from relying on the QPAM exemption, and there are other exemptions, such as the service provider exemption, that probably provide as much exemptive relief as the QPAM exemption, it just hasn’t been as popular.”

The service provider exemption under ERISA covers transactions between a plan and a party that exercises discretionary authority or control over investment of plan assets, and lacks the specific DOL guidance provided under the QPAM standard. The QPAM exemption has also achieved a higher reputational status, becoming a badge of honor among fund managers, according to industry leaders.

Asset managers with foreign convictions who need to seek individual exemptions have largely been granted relief by EBSA, which has also provided time extensions for the exemptions.

Under the new DOL framework, plan sponsors will receive more information directly from the asset managers they work with, including notifications of an asset manager’s ineligibility for an exemption within 30 days of a conviction or non-prosecution agreement for a foreign crime.

But this is largely unnecessary because due diligence processes conducted by employer plans already capture the bulk of the information that the amended QPAM rule requires disclosure of, benefits lawyers say.

Finishing Touches

“They hadn’t adjusted the QPAM qualification with respect to the assets under management for quite some time, and they took an opportunity here to look at the rule and expand it in certain places, and obviously one of those places was the criminal aspect of things,” Craig Spenner, partner at Armstrong Teasdale LLP, said of the DOL.

The amended exemption raises the bar with its more specific definition of “criminal conviction,” reversing a Trump-era policy that didn’t take offshore legal violations by asset managers into account in evaluating QPAM eligibility.

But notably the DOL’s final version released in April excludes countries on the US Commerce Department’s list of adversaries, which includes China, Cuba, Iran, North Korea, and Russia. This addressed concerns from Republican lawmakers that QPAM standards could prompt countries to bring false charges against American asset managers in order to jeopardize their retirement businesses.

The final rule also eliminated foreign non-prosecution or deferred prosecution agreements from its list of disqualifying factors for those seeking exempt status.

“I think the proposals had a lot more nuances and a lot more requirements,” said John La Monica, director at compliance consultancy ACA Group. “Firms will probably still rely on the exemptive relief, as we’ve seen pages and pages of disclosures regarding violative activity, and that typically doesn’t stop or prevent plan sponsors from dealing with these entities, particularly because they’re typically larger like the UBSes of the world.”

The final exemption rule amended a proposed one-year transition period during which plans could end their contracts with asset managers deemed ineligible under the new standard, allowing exempted entities to initiate new transactions with existing clients. It also added a recordkeeping requirement to ensure eligible QPAMs can demonstrate compliance with the new exemption conditions.

Despite these changes from the DOL in response to industry pushback, there’s still concern about the effect on asset managers’ QPAM uptake.

“People are worried that, even though it was somewhat receptive to comments that they received, the final rule will still make the QPAM exemption much more difficult to rely on,” Rozow said.

The heightening of standards to qualify for an exemption doesn’t entirely hamstring asset managers, but places the onus on them to change best practices and behaviors to keep their qualifications, according to Spenner.

“The market needs to work with the Department of Labor to check themselves, and the Department of Labor needs to put rules in place that aren’t so overly burdensome to the marketplace that you get paralyzed and can’t go forward,” he`said. “I think they very much tried to do that in the final rules, to find a happy place where the market could live with some of these new rules and changes.”