During a web chat to discuss the Employee Benefits Security Administration’s (EBSA) extensive regulatory agenda, EBSA Assistant Secretary Phyllis Borzi fielded a number of questions about the agency’s plan to broaden the definition of “fiduciary,” and issue a final rule on fiduciary-level fee disclosures under section 408(b)(2) of ERISA, among other topics.

The first rule – which Borzi said will be published by the end of the year or shortly thereafter – would more broadly define who constitutes a plan “fiduciary” for the purposes of rendering investment advice. According to Borzi:

This initiative is intended to assure retirement security for workers in all jobs regardless of income level by ensuring that financial advisers and similar persons are required to meet ERISA’s standards of fiduciary responsibility when providing investment advice. Taking into account significant changes in both the financial industry and the expectations of plan officials and participants who receive investment advice, the proposed amendments would change a thirty-five year old rule that we believe inappropriately limits the types of investment advice relationships that give rise to fiduciary duties.

Borzi defended the agency’s plan to forge ahead with a final rule despite calls that the proposal be re-issued. She claimed that the EBSA’s approach to arriving at a final regulation has consisted of three main steps. First, Borzi stated that the agency is “working to better understand how specific compensation arrangements would be affected by the proposed rule and whether clarifications of existing prohibited transactions exemptions would be appropriate.” She noted that the agency has already begun to issue sub regulatory guidance “describing some of these clarifications and will continue to do so as necessary as we complete our analysis.”

Second, in crafting the final rule, Borzi said that the EBSA is paying particular attention

to the two primary exceptions to fiduciary status under the proposed rule: (1) clarifying the difference between investment education that does not give rise to fiduciary status and fiduciary investment advice; and (2) clarifying the scope of the so-called “sellers’ exemption” under which sales activity is not fiduciary advice. In both cases, we will be directly addressing the comments and concerns that were raised during our extensive public comment period.

Third and finally, Borzi said that when the final rule is issued, the EBSA will also propose one or more “new prohibited transaction class exemptions and/or modifications to existing ones that may be useful to the regulated community so as to not unnecessarily disrupt existing compensation practices or business models, where we can make the requisite finding that the continuation of these activities is sufficiently protective of plan participants or IRA customers.” She noted that the agency is also considering whether to extend the applicability date in order to allow additional time to comply with the new rules. Borzi also defended the proposal against concerns over its interaction with new business conduct rules governing swaps transactions under the Dodd-Frank Act. Borzi claimed that: “we do not believe there are any fundamental inconsistencies with provisions of the new Dodd-Frank business conduct rules and the implementing regulations of the SEC and CFTC, such that the Department’s proposal would result in swap transactions being prohibited by ERISA’s prohibited transactions rules and we have made that belief clear to those who have inquired on that matter. In any event, we intend to make this conclusion clear as we address the issue in the final rule.”

The EBSA also intends to issue a final rule on ERISA’s prohibited transaction exemption that permits the provision of investment advice to participants or beneficiaries of certain individual account plans if the investment advice is provided under an “eligible investment advice arrangement.” She also stated that “there may be implications in applying the prohibited transaction rules of ERISA to current investment practices, particularly in the context of IRAs” in defining who is a fiduciary. Borzi claimed that since the agency has broad authority to issue exemptions from the prohibited transaction rules of ERISA, it would ensure that beneficial advice practices would be permissible, “even if they would otherwise be technical violations of the statute.”

Another popular topic of discussion during the online chat was the 408(b)(2) fee disclosure rule, which sets forth enhanced disclosures that certain pension plan service providers must give to plan fiduciaries as part of a “reasonable” contract or arrangement for services under section 408(b)(2) of ERISA. During the chat, Borzi explained that the EBSA published an interim final rule on this issue in July 2010, and sought public input “on a few discrete issues.” According to Borzi, “the comments were supportive and confirmed our belief in the basic structure of the rule. When fully implemented, this regulation will give plan fiduciaries valuable information about service provider compensation and revenue sharing, and the disclosure of this information will benefit millions of participants and their families.” She claimed that the rule will be finalized “in plenty of time for stakeholders to adapt their systems to any changes from the interim final to the final regulation in anticipation of the applicability date of the 408(b)(2) regulation on April 1, 2012, which was just announced this week by the department.”  Borzi commented that the agency is also moving forward with its related welfare plan fee transparency initiative. The welfare plan initiative involves consideration of whether, and to what extent, service relationships in the welfare plan context should be subject to similar fee and compensation disclosure requirements.

With respect to a final rule implementing the requirement that the administrator of a defined benefit pension plan provide participants, beneficiaries, and other parties with an annual funding notice, Borzi stated that the Department is reviewing a number of comments to the proposal, and that it expects a final regulation to be published by January 2012.

Borzi also mention that new to the Spring 2011 semi-annual agenda is a Request for Information Regarding Electronic Disclosure By Employee Benefit Plans. Borzi described the development as initiating “a conversation on whether, and possibly how, to expand or modify the Department’s electronic disclosure rules for employee benefit plan information.”

A few chat participants asked about the EBSA’s longer-term regulatory initiatives implementing provisions of the Affordable Care Act. When asked when the agency planned to issue guidance on automatic enrollment in health plans and the provision of a summary of benefits as required by the Act beginning March 23, 2012, Borzi claimed that the DOL, Department of Health and Human Services, and the Treasury Department “are actively working to issue a proposed rule as soon as possible.” Similarly, the three agencies are collaborating on rules to implement the auto-enrollment provision, and will issue guidance in the future. Borzi reminded participants that until regulations are issued and effective, employers are not required to comply with the auto-enrollment provisions.

Another chat participant asked wither early retiree welfare benefit plans must follow annual and lifetime maximums under the Affordable Care Act. Borzi responded:

if a plan covers less than two participants who are active employees (including some retiree-only coverage, depending on how the plan is structured), the PHS Act section 2711 rules prohibiting lifetime limits and restricting annual limits do not apply. The key issue is often a factual one as to whether the plan is structured so that it does not cover two or more active employees. It does not matter if a retiree is an early retiree or is age 65 or older.

Other information provided during the chat include the following:

• As part of the EBSA’s “lifetime income” initiative, the agency “is considering, as part of the pension benefit statement regulatory initiative, requiring that pension benefit statements for defined contribution plans express the participant's ‘total accrued benefit’ in the form of a lump sum account balance and in the form of a lifetime income stream.”
• The agency is working on proposed regulations that will be published later this year or early 2012 that will address pension benefit statements under ERISA section 105(a) and recordkeeping and reporting requirements under ERISA section 209(a).
• When asked whether under the participant-level fee disclosure and self-directed balance forward retirement plans a plan sponsor could designate all of the investment options as "self-directed brokerage accounts" to circumvent the intent of disclosure to participants, Borzi stated that the rule “has specific provisions on self-directed brokerage windows accounts. If we see conduct designed to circumvent the clear intent of the regulation that would likely lead to an enforcement action.”

A complete transcript of the web chat can be found here.

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