In letters to the Department of Labor, the securities industry and Senator John Kerry (D-MA) expressed concern about Q&A 30 in a recently issued Field Assistance Bulletin 2012-12, involving retirement plan participant disclosures. Senator Kerry and the securities industry asked DOL to withdraw Q&A 30 and pursue this issue through a formal rulemaking, which would allow for the appropriate level of public comment and notice with respect to this element of the guidance. Their main concern is that Q&A 30 does not provide interpretative guidance regarding the disclosure obligations but rather sets forth new rules that were not previously contained in any previous DOL guidance. Specifically, Q&A 30 states that plan fiduciaries may have liability if they do not designate a manageable number of investment alternatives and if they do not provide the regulatory disclosures with respect to investments in which a significant number of participants are invested through a brokerage window available under the plan.
While not expressing any position regarding the substance of Q&A 30, Senator Kerry fears that the lack of advanced warning and the inability of the regulated community to comment will have serious unintended consequences for plans. Further, because there is no delayed effective date with respect to actions against plan fiduciaries pursuant to Q&A 30, these new rules are effective immediately. With respect to brokerage window investments, the general due date for disclosures may technically be August 30. Senator Kerry noted that, due to the lack of advance notice, a vast number of employers will not be able to comply in any way by the August 30 deadline. The Senator has also become aware that many experts on small business plans are concerned that these rules and potential liabilities could result in the termination of many small business plans.
In its letter, SIFMA was troubled by the fact that the Department has changed well-established law and policy regarding plan fiduciaries’ duties and imposed new requirements with respect to investment selection and monitoring, all done through a FAB that was intended to clarify participant disclosure compliance issues. The DOL indicates that the failure to designate a manageable number of investment alternatives raises questions as to whether the plan fiduciary has satisfied its obligations under ERISA.
The securities association noted that DOL has never suggested in any rulemaking that a plan sponsor’s decision to comply with Section 404(c) of ERISA by making available the broadest range of investment alternatives through a brokerage account or window could somehow be viewed as violating Section 404(a). The SIFMA letter was signed by a number of organizations representing a significant part of the retirement plan community, including the Investment Company Institute, the American Bankers Association, and the Investment Adviser Association.
Also troubling to the industry is DOL’s failure to provide guidance as to when or how any fiduciary would comply with this newly created fiduciary principle. By articulating a new fiduciary principle in the form of an answer to a question in the FAB without any of the public input that accompanies an appropriate rulemaking process, continued SIFMA, the Department exposes plan sponsors to the substantial risk of litigation over the number of investment options offered by a plan. In addition, Q&A 30 creates fiduciary consequences for plan sponsors through the challenge they will face in identifying or not identifying securities in brokerage windows as designated investment alternatives. In this regard, SIFMA noted that, heretofore, the fiduciary obligations associated with the construction of an investment menu for a 401(k) plan have been viewed by most as limited to ensuring that designated investment options are prudent, not whether they include too many or too few choices.