Government can produce a lot quickly, when under pressure to do so. Those of us who watched the filmed version of the musical Hamilton over the July 4 weekend were reminded that Alexander Hamilton wrote 51 Federalist Papers in defense of the new Constitution, which were published over a period of less than a year.
Hamilton takes a small number of liberties—pun intended—with history, in service of telling a compelling story. One liberty is the influence that Alexander’s essays have, relative to those written by John Jay and James Madison. It is Madison’s Federalist number 10 that is the most well-known today, because of its prophetic understanding of the role factions would come to play in American politics. Factions, which we now call interest groups, continue to dominate policymaking in Congress and the regulatory agencies. Often the interests of factions serve to slow down new laws and regulations.
But not always. In particular, in the last year of a presidential term, just like college kids during the final few weeks of a semester, regulators race to finish their assignments before the election. In the last few months, we have seen a flood of proposals and final rules from the Department of Labor (DOL). It has been hard to keep up.
Let’s begin with a development nearly a decade in the making. When we talk to plan sponsors about policy developments in Washington, one topic above all causes their eyes to light up: reducing the amount of paper that must be sent to participants and beneficiaries.
On May 27, the DOL finalized a regulation that will make it much easier for plans to deliver ERISA-required documents to plan participants and beneficiaries electronically.”
This new regulation greatly expands on prior rules by allowing default electronic delivery for any plan participant, beneficiary or alternate payee who has provided an email address (or other electronic address such as a smartphone number) to the employer, plan sponsor or plan administrator. Alternatively, the rule permits the use of an email address that is assigned by an employer to an employee, as long as the email address was assigned for at least one other employment-related purpose. Once a plan has a valid email or other electronic address, a required disclosure can be provided either by directly emailing the document or by sending a notice that the document has been posted on a website for access.
The rule includes some conditions to protect participants. Perhaps the most important protection is that individuals can always receive plan communications in paper form. What the new rules do, however, is allow the plan to change the default: as long as the plan has an email or other electronic address for the individual, the individual receives documents electronically by default but can opt-out to paper at any time and at no charge.
Of course, the new rules are not perfect. They cover only documents required by ERISA and DOL regulations and do not cover disclosures required by IRS or the SEC. They place requirements on the systems and websites used to deliver documents that will require programming before they can be rolled out. Interestingly, in the final regulation the DOL moved up the effective date, making the rules available almost immediately (rather than in 2021 as originally proposed), citing, in part, the coronavirus. But given how much plans and service providers need to do in 2020 to address provisions of the CARES Act and the SECURE Act, this new option may take time to implement.
The electronic disclosure rule was an “assignment” the DOL had to finish because a presidential executive order directed the DOL to do so. Finishing projects that are the subjects of executive orders will be a theme for the rest of 2020.
Another example is a proposed regulation the DOL released on June 24 related to the investment duties of ERISA fiduciaries. The proposal, if finalized, would confirm that ERISA plan fiduciaries are required to select investments based solely on financial considerations and not on environmental, social, and governance (ESG) considerations, unless an ESG factor has a material effect on the risk and/or return of an investment.
The proposal is the latest in a series of guidance that the DOL has provided on ESG issues in plans over the past few decades, and has generally been anticipated since President Trump issued an executive order on energy policy in April 2019. That order directed the DOL to review existing guidance on fiduciary responsibilities, including with respect to a fiduciary’s responsibility to maximize the return on ERISA plan assets.
The extent to which fiduciaries can take into account ESG factors, or otherwise consider collateral societal goals, has been the subject of ping-pong guidance dating back to the Clinton Administration. We suspect this will not be the last word on the subject.”
Much of the proposed regulatory language restates well-settled principles about the need for fiduciaries to act prudently and solely in the interests of the plan and its participants. However, the explanatory preamble takes a markedly negative view of the use of ESG factors in investment decisions, and would impose new requirements on ESG investments in plans. For example, the proposal would provide that ESG-themed investments should not be used as the plan’s qualified default investment alternative, or QDIA. Even if an ESG fund is simply another investment alternative on the plan’s menu, the proposal would require fiduciaries to use only objective risk-return criteria and document the selection and monitoring of the investment. The proposed regulation would also impose documentation requirements if ESG factors are considered as a “tie-breaker,” and in fact the DOL expresses skepticism that any two investments would actually be otherwise identical.
Since we are talking about a proposal that could look very different if Joe Biden wins in November, the DOL released its long-awaited rules regarding fiduciary investment advice on June 29.
In 2018, the United States Court of Appeals for the Fifth Circuit issued an opinion vacating the 2016 Obama-era fiduciary rule. Other than some temporary enforcement relief, the Trump Administration has been largely silent on the topic, until now.
The DOL’s latest foray into investment advice for plan participants and IRAs was in two pieces. First, the package includes a technical amendment under which the DOL reinstates the pre-2016 five-part test for determining fiduciary status. The technical amendment also reinstates the interpretive bulletin from 1996 (IB 96-1) relating to investment education.
Second, the DOL is proposing a new prohibited transaction exemption that would allow financial professionals that are fiduciaries to provide advice and be compensated for that advice, including in the context of rollovers. The conditions of the exemption in many ways look very similar to the conditions that the Securities and Exchange Commission imposes under its Regulation Best Interest, which went into effect on June 30.
An important theme of Hamilton is how government is about legacy, and the next few months could be about the legacy of this labor department. The DOL is hoping to move swiftly to finalize these and a number of other projects in case President Trump is not reelected.
Davis & Harman LLP is a regular contributor for Bank of America, focusing on legislative and regulatory matters affecting employee benefit plans. The opinions expressed are Davis & Harman’s and do not necessarily reflect the opinions of Bank of America.