Three Defined-Contribution Rules Face Ticking Clock

By Staff Report

Dec. 24, 2008

Three key defined-contribution proposed regulations could be in jeopardy because the Department of Labor failed to win White House approval far enough ahead of the change in presidential administrations, pension industry lobbyists and attorneys said.

One regulation would set ground rules for providing investment advice to participants in DC plans. A second would detail the fee information that the plans are supposed to provide to plan participants, while the third would spell out the fee and compensation information that service providers have to provide to DC plan sponsors.

All three measures have been staunchly promoted by Bradford P. Campbell, assistant secretary of labor and head of the Employee Benefits Security Administration. Campbell had hoped to make the rules final before January 20, when the Obama administration will take control of the executive branch.

But none of the regulations have received final approval from the White House’s Office of Management and Budget. In a May 9 memo, Joshua B. Bolten, the president’s chief of staff, told all executive branch department and agency heads that any new regulations to be approved during the remainder of the Bush administration, “except in extraordinary circumstances,” had to be proposed by June 1, 2008, with final rules issued no later than November 1.

Lobbyists said that even if the OMB approves the regulations soon, the rules aren’t likely to become effective before the Obama administration takes over. Even if they are approved, the regulations would then be expected to be put on hold pending fresh reviews, which could result in dramatic changes.

(New federal rules usually don’t go into effect until at least 30 or 60 days after their publication in the Federal Register. In its proposals, the DOL set the effective dates for the investment advice and service provider disclosures 90 days after publication. The participant disclosure regulations were proposed to go into effect for plan years beginning on or after January 1, 2009.)

“All three rules will be scrutinized closely by a new administration as a matter of course, even if they weren’t controversial,” said Jon Breyfogle, an ERISA attorney with Groom Law Group, Washington.
Rep. George Miller, D-California, and other leading congressional Democrats have concerns with all three proposed regulations. The fee disclosure proposals have long been perceived as regulatory efforts to pre-empt further-reaching fee disclosure legislation that has been championed by Miller, who is chairman of the House Education and Labor Committee.

The DOL’s investment advice proposal also has come under fire from Miller and other leading congressional Democrats because it would dramatically open the door for mutual funds and other investment companies to offer investment advice directly to participants in defined-contribution plans.

Mutual fund companies long have been effectively barred from offering direct advice to participants because of fears that the advisors might steer participants to their companies’ own investment options.
But under the DOL’s proposal, mutual fund employees would be able to offer one-on-one advice directly, as long as the employee’s compensation doesn’t depend on the investment options selected by the participant, and the advice meets other key conditions.

The participant disclosure proposal is intended to ensure that DC plan participants are informed about investment-option fees and expenses. The service provider proposal is intended to ensure the plan sponsor has enough information to determine whether service provider fees and compensation arrangement are reasonable. Miller doesn’t believe either proposal provides sufficient information.

Of the three pending proposals, ERISA experts say the service provider one is the most likely to be approved by the OMB, because it was proposed well before the other ones and is the least controversial.

The proposals on participant disclosure and investment advice face another hurdle because they failed to meet Bush administration deadlines for publication of new regulations during the final year of the administration.

The EBSA’s investment advice rule was proposed August 22, while the participant disclosure rule was proposed July 23—and neither regulation is yet final. The service provider proposal was proposed originally by the Employee Benefits Security Administration on December 13, 2007, well ahead of the deadline.

The proposed service provider rule and the investment advice proposal were both listed as being under review on the OMB’s Web site.

“We cannot yet tell what is going to happen with final rules because we are still working on them,” Campbell said in a statement for Pensions & Investments. “With about 30 days left for OMB to process regulations in this administration, the department is hopeful our final regulations will be completed.”

Despite the missed deadlines, there’s a chance the regulations could be adopted.

“The Bolten memo set deadlines to ensure final regulations are developed in a way that preserves the integrity of the regulatory process, including adequate time for analysis, interagency consultation, public comment, and evaluation of and response to those comments,” said Abigail Tanner, an OMB spokeswoman, in an e-mail to Pensions & Investments. “The memo allows for extraordinary circumstances, which may include rules that are required by judicial decisions or statute, routine in nature, or essential operations, or occasioned by a late change in law.”

However, if the EBSA’s proposed regulations fail to win OMB approval, the dozens of comments filed in the DOL’s investment advice proceeding — and the approximately 100 comments filed in response to the agency’s participant disclosure proposal—could still prove to be helpful to Miller’s efforts to enact new DC plan fee disclosure legislation next year, pension industry lobbyists said.

“Even if the regulations aren’t issued, it doesn’t mean the whole regulatory process was in vain, because it was a tremendously educational experience that complements the legislative activity we expect next year,” said Ed Ferrigno, vice president of Washington affairs for the Profit Sharing/401(k) Council of America, Chicago.

(For more, read “A Cool Head Under Pressure.”)

Filed by Doug Halonen of Pensions & Investments, a sister publication of Workforce Management. To comment, e-mail

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