While the DOL specifically states that the proposed rule is both intended to be more readable and also change its substance, it seeks comments only on: “The Department requests comments on these changes, particularly whether the changes improve the clarity of the procedure and whether additional clarifying edits would be useful.”
Advisors may feel pulled in a hundred directions trying to follow developments in retirement from the SECURE Act 2.0 and market news. The Department of Labor has announced a major change to its process of assessing requests for exemptions from prohibited transactions. As always, reach out to your counsel if you need specific advice about how these proposed rules or actions effect your business.
Advisors may want to take note of the Department of Labor’s recent posting concerning a change to the manner in which prohibited transaction exemption applications are filed. The DOL initially published its proposed rule change on March 15, 2022 and anticipated receiving comments from the public and public interest groups until April 14, 2022. It now has extended that time period to May 29, 2022 so that more groups can respond.
The proposed new rule may sound merely administrative at first glance but is actually highly substantive. As benefits law experts Groom Law stated “These proposed amendments, if finalized in their current form, would impose significant new requirements on exemption applicants and other entities who may be involved in exemptions (e.g., independent fiduciaries and appraisers) and could significantly limit the availability of exemptive relief.”
The Department of Labor notes that the proposed rule focuses on ERISA section 406(b). That section “prohibits a plan fiduciary from (1) dealing with the assets of a plan in his or her own interest or for his or her account, (2) acting in any transaction involving the plan on behalf of a party whose interests are adverse to those of the plan or its participants and beneficiaries, or (3) receiving any consideration for his or her own personal account from a party dealing with the plan in connection with a transaction involving plan assets, unless an exemption specifically applies to such conduct.”[1] Section 408(a) of ERISA allows the Secretary of the Department of Labor to grant administrative exemptions from those sections where the relief is appropriate and in the interests of the plan and its stakeholders. These exemptions can be made on an individual or class basis. “Persons who are in conformity with all the requirements of a class exemption are not ordinarily required to seek an individual exemption for the same transaction from the Department.” Individual exemptions require an examination by the DOL on the specific facts and conditions of the transactions. The Department can also move on its own to create exemptions.
Since it’s inception in 1975, the DOL has made substantive changes to this rule to ease the burden on those filing and to clarify it’s review process. The last revision was in 2011. “The updated Exemption Procedure Regulation promoted the prompt and efficient consideration of all exemption applications by (1) clarifying the types of information and documentation generally required for a complete filing, (2) affording expanded opportunities for the electronic submission of information and comments relating to an exemption, and (3) providing plan participants and other interested persons with a more thorough understanding of the exemption under consideration.” It’s current review involves 23 individual sections. The proposed rule addresses each of those sections individually.
While the DOL specifically states that the proposed rule is both intended to be more readable and also change its substance, it seeks comments only on: “The Department requests comments on these changes, particularly whether the changes improve the clarity of the procedure and whether additional clarifying edits would be useful.”
The new rules would remove a previous procedure whereby Plan Sponsors and others could approach the DOL to ask if a proposed transaction would need to be the subject of an exemption request. Those meetings were often held off record. All such meetings would now be on the public record and available to the public.[2] Also of specifically important substance, the new rule would clarify that past exemptions or substantially similar exemptions would not qualify a party from a future exemption.
Other substantive changes involve the rule by which the DOL would determine if a fiduciary or appraiser is independent. This change would move from the previous less 2% of the entity’s income being derived from the parties requesting exemption, though 5% or less is still presumptively independent to a full stop at 2%. This is notably stricter. Additionally, both appraiser and independent fiduciary must be independent of not only the parties but each other. The new rules would also impose liability insurance on said independent entities.
The proposed rule also applies the impartial conduct standards to all of the transaction, as well as all of the filing materials presented to the DOL. Commentators note that “This is a significant expansion of DOL’s policy and would create a fiduciary standard for exemptions covering IRAs that are exempt from ERISA’s fiduciary standard of care.”
Among other substantive changes, the parties filing for the exemption must now provide more information to the DOL. That additional information includes a detailed description of potential alternatives to the transaction.
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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