ERISA’s Increasing Importance

By Randy Myers

The stock market crash of 2007-2009 threw into stark relief the shortcomings of the U.S. retirement system. Millions of Americans are responsible for their own retirement security via 401(k) plans, and as the Dow Jones Industrial Average fell nearly 50 percent, many of them saw their retirement dreams jeopardized.

Now, with more than 76 million Baby Boomers at or nearing retirement age, the U.S. Department of Labor (DOL) is seeking to strengthen that retirement system—a responsibility it shoulders under the Employee Retirement Income Security Act of 1974 (ERISA).

Veteran investment banker Michael Davis was thrown into the effort in May 2009 when he was sworn in as deputy assistant secretary for DOL’s Employee Benefits Security Administration. It was about that time, he told participants at the 2011 SVIA Fall Forum, that EBSA was tasked with reviewing the appropriateness of target-date mutual funds for retirement savers.

Some members of Congress became concerned that target-date funds, especially those with a target date of 2010, were too heavily invested in stocks. Many had suffered severe losses during the 2007-2009 stock market crash. Some critics pushed DOL to specify just how much of a target-date fund’s portfolio could be allocated to equities.

DOL demurred on that point, Davis said, deeming it an inappropriate path for regulators. EBSA did, however, do three other things after concluding that there was a disconnect between what fund providers thought they were offering investors in target-date funds and what investors thought they were getting. First, it issued guidance to retirement plan participants on what to look for when investing in target-date funds. It also started to develop guidance for retirement plan fiduciaries to choose and monitor target-date funds for their plans; that work is nearly complete. Finally, it proposed regulations that would require plan administrators to disclose more information to plan participants about the target-date funds offered in their plans.

Apart from its work on target-date funds, EBSA also has been developing the regulations needed to implement the new section 408(b)(2) of ERISA requiring greater fee transparency by defined contribution retirement plans. Beginning in April 2012, assuming no delays are announced before then, service providers will be required to disclose more information about their retirement fees. Shortly thereafter, under Section 404(a) of ERISA, plans will be required to share more fee information with plan participants.

“We have finished our work and the regulations have been cleared by the Office of Management and Budget,” Davis said, indicating that the regulations could be issued “any day.” (See “Plan Sponsors, Service Providers Prep for New Fee Disclosure Rules” in this edition of Stable Times.)

In the meantime, EBSA is continuing activity on several other fronts, too. One of its major initiatives, Davis said, is to look at what can be done to help retirees secure lifetime income in retirement. With the Baby Boomer generation starting to retire, many people will soon be shifting from trying to accumulate assets to figuring out how to spend them responsibly. “What advice should be given, what products are out there?” Davis asked. “That conversation is just beginning.”

Davis said EBSA is looking into whether retirement plans should be required to report account balances not just as a lump sum but also in the form of a monthly income equivalent. However, he said, it is not in favor of requiring retirement plan participants to annuitize their retirement plan savings.

Elsewhere, EBSA is revisiting the question of who qualifies as a fiduciary to retirement plans, Davis said. The original definition under ERISA was quite broad, he said, and in practice wasn’t ideal. Under guidance issued in 1975, for example, someone giving important but one-time advice to a plan could escape fiduciary responsibility. He said ESBA hopes to have new language out for consideration by early 2012.