Participants in the recent Plan Sponsor Council of America’s National Conference recently got an opportunity few do—two former Assistant Secretaries of Labor from different administrations on the same stage.
The session, moderated by former congressman Harold Ford, Jr. (now with PNC), provided an opportunity to hear from Phyllis Borzi and Preston Rutledge on a variety of regulatory issues and proposals, including a new prohibited transaction exemption on offering investment advice, as well as ESG rule.
The Mission(s)
Asked to speak to how the Department assists plan sponsors, Borzi noted that the mission of the Employee Benefit Security Administration (EBSA) consists of three parts:
- to provide guidance to plan sponsors (“everybody hates uncertainty,” she noted), of which an important component is public input;
- compliance assistance (“the world and its rules are complicated, and people need help, both through national and field offices,” she commented); and
- to do outreach sessions or meetings—like the presentation at hand.
Rutledge acknowledged the importance of those roles and went on to note that one of EBSA’s lesser known resources is a part of the agency called Benefit Advisors. “Those are the folks who answer the 1-800 numbers when you call,” he noted. While he explained that participants call that number all the time, he noted that many people don’t know that plan sponsors can take advantage of that resource as well.
Trading Places
Ford acknowledged that both took over from administrations of different political parties—and with the Biden administration representing yet another of those leadership changes, asked the former secretaries what advice they might off the new Biden administration, and what new things that they might have on their minds.
Borzi noted that it’s common for those who come into those roles to have some specific issues in mind, a relatively short list. She noted that on her list when she was confirmed to the post in 2009 was making sure that people understood the growing importance of health and welfare plans.
As for her advice to the Biden administration, Borzi said they should start by trying to build on what was done before—“not that everything that was done is bad.” She noted that her tenure began with a focus on fee disclosure, which has been started by her predecessor in the Bush administration. She stated that one thing that people might be surprised about is how “incredibly prepared” the Biden team was, and that they had a good sense of what needs to be done, with key areas of expanding coverage and ensuring adequacy.
Rutledge commented that when he came into office at thew end of 2017, the Trump administration had already issued a series of executive orders. “Everybody thinks of what we do as retirement, but health care looms large” he noted, going on to state that the agency’s highest priority will be the one(s) from White House if they are sent out. “Climate change is a big deal for this administration,” he explained, acknowledging that environmental, social and governance (ESG) and proxy voting rules are affected by that focus, and that he expects that they will work on those issues. With regard to that focus, he noted that the comment period on new rules/regulations was “so important,” explaining that every time the agency had one during his term, they made at least one significant change to rulemaking based on public comments.
ESG
Speaking of ESG, Ford asked the panel how plan sponsors should be thinking about it.
Rutledge noted that while the Biden administration has put a “pause” on the rule, his expectation is that in the institutional investing world things that are invested in ERISA plans—some $10 trillion, he pointed out—are governed by the exclusive purpose rule, including investment decisions. Clarifying the point for those who might have wondered at the focus on “pecuniary” interests in the ESG rulemaking, he explained that it came from the U.S. Supreme Court, which coined the term as it relates to those decisions. “When I think of ESG, it is becoming financially material,” he noted, going on to comment that he thought it was the tone in the preamble to the initial proposal that was the most controversial, rather than the actual rule itself.
“That last comment is really on point,” said Borzi, “the tone was how it was framed.” She noted that the way of looking at ESG investments “hasn’t really changed from a legal view because the statute hasn’t changed” and went on to comment that, “the question is, should we put our finger on the scale, and if so, which way.” Borzi explained that during her tenure the agency “tried to be more neutral in tone,” a focus that she said was informed by two years of taking comments and looking at the international experience—though their focus was, of necessity, different because of ERISA.
The challenges, she said, were how to differentiate between pecuniary and non-pecuniary, as well as the shifting definitions. Not only has the name changed (from socially responsible investing), “but the substance has also evolved,” she noted. Borzi cited two “missing links”: a consensus definition of the term, and “most importantly any kind of benchmark or way to measure.”
Consequently, Borzi explained, during her tenure the agency “first tried to recognize that times have changed, and these investments in some cases had also changed.” Citing the “all things equal” standard that emerged—which allowed consideration of ESG factors if all other considerations were deemed to be equal—“What we discovered is that these tools had begun to emerge that showed that before you got to the measurement, there were financial factors that entered into the decision,” she explained. However the final result might have been viewed by the industry, Borzi said, they “tried not to put our finger on the scale”—“You could always do it, but you had to be careful,” she explained. “The bad thing,” she acknowledged, “is flip-flopping. There’s no reason for the rules to be changed.”
Rutledge concurred on the impact of flip-flopping, but commented that prior to the Trump administration’s recent forays, nothing had been done in the view of notice and comment rulemaking—“this was the first time EBSA had ever taken formal comments,” he noted. He added that there was a significant statement made in the preamble that pointed out there is “already an important social goal of these investments”—that is, the provision of adequate retirement income and the retirement security of participants. “That is an important social goal, and has been since the passage of ERISA,” he pointed out. “Maximizing risk-adjusted return is how we do that.”
The Fiduciary Rule
With regard to the controversial path of the so-called fiduciary rule, Borzi commented that they started with the notion that making these financial decisions is hard, and that, despite an expansive focus on financial literacy and education, “we’re bad at it.” Acknowledging that many individuals are either not interested in it or are incapable of dealing with it, she said the agency under her leadership “started with the premise that everyone needs advice,” but research showed it was hard for individuals to know whom to trust. “We wanted to level the playing field, but the line between sales pitch and investment advice was impossible to draw,” she explained.
While most of the debate on the fiduciary rule has focused on individuals, Borzi noted that following her years in private practice she came from the point of view of plan sponsors, particularly small ones. “We get them interested in offering a plan, and then “throw them to the wolves, because they don’t know how to do the plans,” she explained. As a result, plan sponsors being victimized, were in many cases connecting with individuals with who held themselves out as experts.
She explained that EBSA enforcement data bore this sense out in lots of cases where there were breaches of fiduciary duty, where losses had occurred, “but when you tried to hold them accountable, the only person who was the fiduciary was that small plan sponsor, who had relied on those experts,” she noted. “We had to choose between leaving them unaccountable, or going after the small plan sponsors,” she explained, ultimately concluding that the major problem from a policy perspective was that the “financial incentives were not aligned with the financial interests of the recipients of the advice.”
Two ways were determined to fix this problem: either clearly delineate the lines between recommendations, or have another group who was simply salespeople. “We tried that in 2010, but didn’t do a good job” she commented, going on to note that the agency was “trashed” for that—and perhaps rightly so.
The other solution the agency determined was to establish a baseline of fiduciary responsibility so that those who do it are accountable. “That’s what we tried to do—to make it easier for people to rely” on the recommendations. “We didn’t do it perfectly, but it was the best we could do at the time.”
Rutledge picked up the narrative at that point, explaining that the fiduciary rule was put on pause, and that shortly after his arrival, the Fifth Circuit vacated the rule. “Our focus from that point on was that there were three regulatory bodies involved—SEC, state insurance regulators and the DOL.” EBSA’s desire—“recognizing that all operate under different rules and structures”—was to “mitigate confusion,” he explained, commenting that they “wanted the SEC to go first, and then align our focus with theirs.”
That said, and with the new version not slated to go into effect until after the change in administrations, Rutledge commented that the Biden administration’s decision to let the rule go into effect “has laid a good groundwork to calm markets,” while providing an opportunity for them to “methodically and thoughtfully” explore the issue. “The issue won’t go away, because the core goal—protecting participants—won’t go away.”
Coverage and Adequacy
Ford then circled back to one of the issues cited earlier in the discussion—coverage and retirement security. “How do we help ensure that all Americans can achieve a secure retirement?”, he asked.
Borzi said that tackling the issue was “ripe” for a public/private partnership. “The issue is broader than retirement savings,” she explained, noting that income inequality plays a big part in it, and that the issue needs to be tackled holistically. Those efforts were “just beginning” during her tenure, she commented, explaining that they were working with community leaders to reach out to those with lower savings rates, to “go where people are.” People have to have income before we can spend a lot of time getting them to save, because people don’t believe they can, she commented.
Rutledge noted that there are now tools in place for plan sponsors that can help them set up a plan, or they can join one of the new pooled employer plans (PEPs) authorized by Congress in 2019 as part of the SECURE Act. He commented that Congress was probably going to provide some kind of governmental encouragement/subsidy for saving, specifically the Saver’s Credit, but made into a refundable credit. While the Saver’s Credit has been around for a while, “it needs to be expanded to more people and liberalized to be direct deposited to an account,” he noted. “I agree that lots more education needs to be done, but people need the capacity to save.”
Audit Advice
Closing out the session, Ford asked the former agency heads what advice and counsel they would offer plan sponsors with regard to finding themselves involved in a DOL audit.
Rutledge commented that “stress will never be avoidable,” but that plan sponsors can make the process smoother if they have been trying to comply all along, by documenting decisions, keeping contemporaneous records, explaining how they were trying to comply. Plan sponsors “can’t rush at the end and do that,” he explained.
Borzi, who commented that she’s been on both sides of the audit table, offered the following advice:
- Come to it with a cooperative attitude.
- Negotiate—she explained that while the audit letter asks for everything, that you can negotiate in good faith to limit the scope or timeframe of the audit.
- Organize the material so that you’re not “floundering.”
She closed with two more pieces of advice—don’t volunteer information, but try to be precise, to answer questions. “Don’t stonewall, but don’t volunteer,” she said. She also advised plan sponsors to maintain the process as a paper audit. “Give them a lovely room, coffee, but don’t let them wander around your workplace.” And she closed by reiterating what former Secretary Rutledge said—that it’s “critical” that decisions be documented on a contemporaneous basis. “You can’t keep too much documentation,” she explained. “You’re judged on a prudent process, and that requires documentation.”
- Log in to post comments