Retirement Plan Exemptions Revamp Tops Regulators’ 2023 Lineup

A pair of proposed regulations the US Labor Department has carried over into the new year may upend the process retirement plan providers use to temporarily skirt conflict-of-interest laws, but critics have complained those rules also make benefits more expensive and hard to deliver.

DOL’s Employee Benefits Security Administration proposed two new rules last year that would toughen the standards service providers use to qualify as “gold-standard” professional asset managers, reducing the pool of independent service providers plans can hire.

Both rules are awaiting final edits by the Labor Department. Officials have repeatedly pushed back the comment deadline for both to allow stakeholders more time to weigh in.

Labor officials say they’re responding to an evolving, complex, and sophisticated financial service provider industry and that they need more information about companies to discourage self-dealing. The asset management industry and their counsel have balked at the proposals, claiming the department is overreaching beyond its regulatory constraints and scaring away customers.

At issue are prohibited transaction exemptions—passes the department gives companies to make trades on behalf of retirement plans that Congress has otherwise deemed illegal. EBSA is poised to make it harder for companies to qualify for those exemptions this year.

“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 US Chamber of Commerce.

Independence Standards

A throughline in the department’s exemption revision strategy is addressing the independence of retirement plan contractors.

Under the exemption procedure rule, the department proposes nixing a bifurcated approach to determining independence by measuring the amount of revenue a firm makes from a client whose exemption is under review. The current standard presumes independence if that number is below 2% of the firm’s yearly revenue. Between 2% and 5%, the agency will carefully consider all other relevant factors.

The EBSA proposal would put in place a hard 2% cap, pushing out firms with a limited number of clients.

“We’re concerned that this new, lower limit creates a barrier to entry for smaller firms and could potentially disqualify firms if they take on a larger client, or larger transaction,” said Adam McMahon, a partner at Davis & Harmon LLP.

Meanwhile, the department’s rule addressing a specific exemption for qualified professional asset managers would require firms to adopt written policies and procedures to ensure compliance with exemption conditions and submit an annual independent exemption audit.

“It’s important to remember that the exemptions process is about authorizing conduct that Congress has otherwise made illegal and that the statute otherwise prohibits,” said EBSA Principal Deputy Assistant Secretary Ali Khawar during a public hearing in September. “That’s part of why we take this seriously.”

Smaller Market

Combined, the two changes threaten to eliminate firms from the retirement plan marketplace. Some say retirement savers will suffer with less competition.

The QPAM exemption isn’t the only way plans can avoid the myriad conflict-of-interest rules under federal law. Alternative exemptions exist, but they’re largely untested from a legal perspective and could slow down trade negotiations.

Alternative exemptions are “narrower in scope and do not serve to support large plan investment portfolios in the comprehensive and flexible manner” that the QPAM exemption does, said Michael Scott, executive director of the National Coordinating Committee for Multiemployer Plans.

Regulators have come under fire in recent years for approving fewer exemptions and imposing stricter standards on the firms that do get agency approval. In that context, benefits attorneys fear the department’s latest proposal is the final nail in the exemption coffin.

“We read the proposal as really sort of the beginning of the end of the exemption process and access to exemptions by making them more difficult, more costly, and more time-consuming,” said Jennifer Eller, a principal at Groom Law Group Chartered and co-chair of the firm’s retirement services practice.