1. The DCIO Leadership Summit The Legal and Political Arena for 2017
Regulation, Legislation and Litigation Concerning the Retirement Plan Industry:
The Legal and Political Arena for 2017
Marcia S. Wagner, Esq. .

2. Topics Impacting the Retirement Plan Industry Today
I. The Fiduciary Rule - What you should know and what you should be doing NOW
II. Court Cases - The recent spike in retirement plan litigation
III. Upcoming Legislation – Its impact on the retirement plan industry

3. I. THE FIDUCIARY RULE – What you should know and what you should be doing NOW

4. Overview of New Fiduciary Rule
Broadening of Fiduciary Definition
DOL’s new rule would broaden scope of advisors deemed to be IRA/plan fiduciaries
Targets broker-dealers (BDs) and registered reps (RRs) earning commission-based compensation
Would change IRA marketplace
Would impact registered investment advisers (RIAs)
Offering rollover advice
Managed account programs

5. Fiduciary Rule and Exemptions
Need for Exemptive Relief
New “investment advice” definition confers fiduciary status on all types of advisors
ERISA’s PT rules ban advisors from earning variable compensation
Exemption required for brokers and insurance agents, including advisors to IRAs
DOL has created Best Interest Class Exemption

6. Best Interest Contract (BIC) Exemption
Scope of BIC Exemption
Advisor can earn variable compensation (such as commissions) for non-discretionary advice
Covered “retail” clients include:
Participants
IRAs (and HSAs, Archer MSAs and Coverdell)
Non-ERISA Plans (e.g., Keogh, Solo Plans)
ERISA Plans (with less than $50 million)
Observations
No relief for variable compensation arising from discretionary advice.

7. What Is The Best Interest Standard?
Three part standard – more than “suitability standard” under FINRA’s conduct rules.
The Advisor must:
Use the care, skill, prudence and diligence that a prudent person who is familiar with such matters would use
Taking into consideration the investment objectives, the risk tolerance and financial circumstances of the client
Without regard to his compensation/interests.

8. Framework of BIC Exemption
4 Alternate Versions of BIC
“Full Blown” BIC for IRAs and Non-ERISA Plans
“Disclosure” BIC for ERISA Plans
“Streamlined” BIC for Level Fee Fiduciaries
“Transition” BIC for 2017 Transition Period
Observations
Firms could potentially rely on “Full Blown” BIC for all retirement clients as of April 10, 2017
If feasible, it may be beneficial to use less onerous BIC versions for different client types

9. “Full Blown” BIC: IRAs and Non-ERISA Plans
Required Terms for Contract
Fiduciary standard of care
General disclosures for compensation and conflicts
Giving specific compensation figures upon request
Compliance policies mitigating conflicts
Mandatory arbitration with reasonable venue is permitted (but must not limit class action rights)
Other Requirements
Transaction disclosures for each investment
Focusing on fiduciary standards and conflicts
1-year relief if advising purchase of same product
Webpage focusing on business model and conflicts

10. “Disclosure” BIC: ERISA Plans
General
Requirements mirror those for “Full Blown” BIC
But no written contract is required
Must give written statement of fiduciary status and general disclosures on compensation and conflicts
List of Requirements
Written statement and general disclosures
Giving specific compensation figures upon request
Webpage focusing on business model and conflicts
Transaction disclosures for each investment

11. BIC Compliance Policies
General
Required for “Full Blown” BIC for Non-ERISA Plans and IRAs and “Disclosure” BIC for ERISA Plans
Differential compensation paid from BD firm to rep must be based on neutral factors tied to services (like time or expertise needed to sell investment)
Expectations
DOL appears to be expecting BD firms to change their payout grids for reps
For example, payouts to rep may vary for different investment categories, but not for similar investments in same category (such as VAs)

12. “Streamlined” BIC: Level Fee Fiduciary
When Does a Level Fee Fiduciary Need BIC?
Offering rollover advice to participants when plan sponsor is existing client, resulting in higher fees
Offering rollover advice to “off the street” participants
Moving from commission- to fee-based services
Streamlined BIC Requirements
Advisor gives written statement of fiduciary status
Advisor documents (internally) reason for rollover recommendation being in client’s best interest
No need for compliance policies or other disclosures

13. So What Should You Do Now?
Depends on where you sit.

14. IARs vs. Registered Reps.
IARs are accustomed to being ERISA fiduciaries, but they need to understand that the ERISA requirements are applicable as of 4/10/17 to their IRA clients.
Real issue will be with registered reps. and commissionable sales.

15. Anticipated Trends in B/D Industry
Strategic Courses of Action
Levelizing commissions and structuring revenue sharing as flat dollar payments
More RRs migrating to advisory service model
Promoting advisory programs featuring institutional mutual funds and variable annuities
Modifying managed account programs to rely on BICE and/or fee levelization
Support for Smaller Retirement Accounts
Reducing minimums for advisory programs
Relying on Computer Model Exemption (robo-advice) to earn commissions
General Fee Compression

16. BD Firm/BIC Officer Responsibilities re: Best Interest
Create reasonable payout grids and monitor
compliance therewith.
Monitor reps. so that they do not skew advice to
highest paying products.
Educate and train registered reps. re: holistic
financial planning and fiduciary responsibility
NOTE: It is beyond the scope of this presentation to discuss appropriate share classes and potentially winnowing down the investment line-up. 

17. Financial Advisors - Strategic Use of Financial Plans
Consider using financial plans to ensure recommendations are in “Best Interest” of client
Quality financial plans by their nature can help demonstrate prudent advice
BIC compliance policies must address conflicts and variable compensation issues
Requiring financial plans (before investments are recommended) can help mitigate conflicts

18. Product Manufacturers - Be A Thought Leader and Innovator
Now Is The Time to Increase Your Footprint
Consider publishing white papers
Consider providing toolkits for rollovers, BICE, templates, compliance policies.
Consider having a help desk.
Make life for BIC officer and CCO easier, they will be overwhelmed.
Consider opinion of counsel regarding best interest standards and how your product fits in.
Consider assisting with education and training of broker-dealers, financial advisors (not selected based on assets with you!) regarding the new fiduciary rule.

19. II. COURT CASES – The recent spike in retirement plan litigation

20. Tibble v. Edison International
Beneficiaries claimed that Edison violated its fiduciary duties when it imprudently offered six higher priced mutual funds when materially identical lower priced mutual funds were available.
The Supreme Court found that a fiduciary has “a continuing duty to monitor trust investments and remove imprudent ones,” in addition to his/her duty to exercise prudence in selecting investments.
Fiduciaries need to carefully monitor investment and document their findings.
A gap analysis should be performed periodically to ensure that investment are properly monitored.

21. White v. Chevron Corporation
Plaintiffs’ allegations included:
selecting a money market fund as a capital preservation fund, rather than a stable value fund
providing “retail” investment options rather than the lower cost “institutional versions” of the same investment options
providing mutual funds, rather than other lower cost investment options such as collective trusts or separate accounts
failing to put plan administrative services out for competitive bidding on a regular basis, and as a result paying excessive recordkeeping fees through revenue sharing
retaining a particular fund as an investment option despite its underperformance prepared to its benchmark, peer-group, and lower cost investment alternatives
failing to monitor its appointees’ performance and fiduciary process
failing to ensure that the appointees had a fiduciary process in place
failing to remove appointees whose performance was inadequate

22. Tussey v. ABB
Failure to monitor recordkeeping costs and negotiate rebates
Plan fiduciaries:
made no effort to determine if fees were reasonable
Replaced one fund with an alternative fund because decision benefitted plan sponsor, not participants

23. Government Audits
The following government agencies routinely audit retirement plans, and plan sponsors should be prepared.
DOL
IRS
PBGC

24. III. UPCOMING LEGISLATION – Its impact on the retirement plan industry

25. How Retirement Plans Affect the Deficit
Impact of retirement plans on federal deficit
DC / 401(k)
$61 billion (2015)
$414 billion (2015 – 2019) DB
$42 billion (2015)
$235 (2015 – 2019)

26. Affect of Limiting Contributions
2017 Plan limitations that can be reduced to limit deficit:
Annual additions from all sources - $54,000
Elective deferrals - $18,000
Plan sponsor deductions – 25% participant compensation
Compensation limit to determine benefits/contributions - $270,000
Limits proposed by Tax Reform Act of 2014
Freezes DC limits until 2024
$63.4 billion revenue gain over 10 years
Additional $144 billion from treating half of 401(k) deferrals as Roth

27. General Limits on Exclusions and Deductions
Proposal limiting tax deductions for plan contributions – could have legs
11.6% tax on employer & employee plan contributions
For high earners only
Basis adjustment for extra tax

28. State Proposals State-managed plans for private-sector workers
Intended to expand access to retirement savings
States would manage investments
DOL clarifies preemption issue in regulation
California Secure Choice
Mandatory auto-IRA
Pooled investments managed by state and guaranteed returns

29. The DCIO Leadership Summit The Legal and Political Arena for 2017
Regulation, Legislation and Litigation Concerning the Retirement Plan Industry:
The Legal and Political Arena for 2017
Marcia S. Wagner, Esq. . A