RMD news, ESG investing and proposed rule on Fiduciary Advice

IRS provides relief on replacing RMD money; DOL proposes rules on ESG investing and fiduciary advice

RMD Update
You probably know that the CARES Act waived Required Minimum Distributions for 2020, at least for most defined contribution plans such as 401(k) plans (RMDs from defined benefit pension plans, or their variant, cash balance plans, were not waived).  But what if you diligently already took an RMD, or what you thought was an RMD when it was taken that turned out to be just a distribution (not required)?  Well, the IRS has given relief in Notice 2020-51 – not only can you roll what you originally thought were RMDs back into a plan (or an IRA), you can ignore the usual 60 day limit and take advantage of this special allowance until August 31.

ESG Investing
The Department of Labor (DOL) published proposed regulations regarding environmental, social, and governance (ESG) investments in qualified plans on June 30.  

I can’t say I read the entire (62 page) rule, but the gist of it, logically, is that if you are a fiduciary (and all of my clients are fiduciaries, whether they know it or like it) you can’t accept a lower rate of return or higher fees just because an investment is socially conscious.  ESG criteria might be used as a tie breaker.  

My advice – it’s not worth messing around with this stuff.  Don’t use ESG criteria when picking funds, period.  

Proposed Fiduciary Advice Prohibited Transaction Exemption
The Department of Labor (DOL) published proposed rules regarding payments to fiduciaries of qualified plans on June 29 in the form of a Prohibited Transaction Exemption.

There is a tortured history of regulations going back to 1975, with intervening opinion letters and proposed and final regs, some withdrawn and some overturned by the courts – truly mind-numbing stuff.  They are going back to the 1975 rule and re-interpreting it.

The reason it is important is that any payment to a fiduciary from a plan is a prohibited transaction.  This is mostly a problem for service providers, especially investment advisors, who couldn’t get paid without a Prohibited Transaction Exemption, which the framers of ERISA understood and immediate granted a blanket exemption.  The intervening years have seen many discussion on who is or is not a fiduciary (generally speaking, a Registered Investment Advisor (RIA) is in fact a fiduciary, but a commissioned salesperson isn’t, or at least thought they weren’t until recent (last ten years or so) guidance from the DOL.  This is mostly an issue for advisors (loosely defined) but sponsors need to pay at least some attention, as there is uncertainty about whether a plan sponsor or someone representing the plan sponsor (e.g. an officer) might be giving advice incidental to operating the plan, as well as the possibility that a call center employee of a service provider might be seen as an agent of the plan sponsor, with their actions being seen as actions of the plan sponsor.

The proposed PTE, as did recent attempted rule changes, attempts to cast a wide net, covering “advisors” in every sense of the word (that is, not just RIAs but broker-dealers (i.e. commission-based advisors).  The exemption is based on “providing advice that is in [the participant’s] best interest, charging only reasonable compensation, and making no materially misleading statements about the investment transaction and other relevant matters,” and obtaining “best execution.”  Which seems fair enough, right?  But the devil is in the details, and I think we can expect more back-and-forth over the meaning of “best interest”, “reasonable”, etc.

I don’t know that there is a conclusion or advice, other than to be aware that this issue is back in the landscape, and to keep an eye out for things that don’t seem quite right from a compensation standpoint (always good advice).

Ed Snyder