In 2016, the Department of Labor (DOL) continued a curtailed program of interpretive guidance under the Employment Retirement Income Security Act of 1974, as amended (ERISA). As has been the case for several years, the regulatory priorities of the DOL’s Employee Benefits Security Administration (EBSA), namely, the Fiduciary Rule under ERISA § 3(21)(A)(ii) and associated prohibited transaction exemptions, dominated the activities and resources of its Office of Regulations and Interpretations and Office of Exemption Determinations.
By year’s end, however, DOL issued an Interpretive Bulletin regarding proxy voting by fiduciaries of employee benefit plans and, in response to requests from the regulated community, an information letter on annuity features in target date funds and a number of individual and EXPRO exemptions from the prohibited transaction rules.
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For only the second year since ERISA’s 1974 enactment, in 2016, DOL did not issue any advisory opinions, nor did it issue any technical releases or field assistance bulletins.
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DOL issued 10 individual exemptions from the ERISA prohibited transaction rules and two EXPRO exemptions.
The number of individual and EXPRO exemptions issued in recent years continues to trend downward, from a combined peak of 51 in 2009.
Interpretive Bulletin
In Interpretive Bulletin (IB) 2016-01, DOL updated guidance regarding proxy voting by fiduciaries of employee benefits plans. This new IB withdraws a prior IB (2008-2) and reinstates prior guidance (IB 94-2) on what ERISA requires of plan fiduciaries with respect to proxy voting and shareholder engagement. In the IB, DOL explains that the principles originally articulated in IB 94-2, as updated to reflect trends on shareholder engagement, are a better expression of a fiduciary’s obligations. In addition, in IB 2016-01, DOL expresses the view that prior guidance has been misread by some stakeholders and that existing guidance to plan fiduciaries has been out of step with trends in investment management. IB 2016-01 clarifies that with proxy voting and other shareholder engagement activities, a plan fiduciary may consider environmental, social and governance impacts. EBSA explains that these factors are intrinsic to the market value of an investment, reinforcing language in IB 2015-01 regarding economically targeted investments.
DOL first issued guidance on this issue in 1979, and that guidance has now changed during the last three presidential administrations—early in the Clinton Administration, and during the waning months of the George W. Bush and Obama Administrations. This pattern of shifting guidance no doubt reflects broader and continuing debates in the polity about corporate governance and other issues. The lack of consistent and reliable guidance, however, stresses the private retirement system and the work of the fiduciaries responsible for those retirement plans. It hardly seems possible that the proper understanding of the statutory duties to participants and beneficiaries owed by plan fiduciaries when they vote proxies for public companies changes with the outcomes of presidential elections.
Advance Guidance
A DOL information letter, issued December 22, 2016, explicates existing guidance about how target-date funds (TDFs) that feature annuities can comply with the requirements of the Qualified Default Investment Alternative (QDIA) regulation. The regulation, which is in the nature of a “safe harbor” for default investments, provides plan fiduciaries with relief from liability for losses resulting from default investments in QDIAs. Among the many requirements for an investment to qualify as a QDIA, plan participants must be able to transfer the default investment made on their behalf from one product to another qualified option after three months.
The particular product described in the information letter invests a portion of a participant’s investment in an annuity sleeve that includes certain liquidity restrictions. Under a strict interpretation of the regulation, the product does not qualify as a QDIA due to the liquidity restrictions. DOL explained, however, that plan sponsors have more latitude to use TDFs that have annuities than is implied in the existing regulatory language. According to DOL, “a fiduciary of a participant-directed individual account plan could, consistent with the provisions of Title I of ERISA, prudently select an investment with lifetime income elements as a default investment if it complies with all the requirements of the QDIA Regulation except for reasonable liquidity and transferability conditions.” DOL cites as a material factor in its interpretation the need for broader use of lifetime income options like annuities in defined contribution plans to supplement to and enhance other accumulated retirement savings.
Prohibited Transaction Exemptions
DOL is authorized to grant a conditional or unconditional exemption for an otherwise prohibited transaction if DOL determines that the exemption is (i) administratively feasible, (ii) in the interests of the plan and of its participants and beneficiaries, and (iii) protective of the rights of plan participants and beneficiaries.
DOL published 10 individual prohibited transaction exemptions (PTEs) in 2016, as compared to nine in 2015, 20 in 2014 and 24 in 2013. Under DOL’s “EXPRO” procedure, which permits expedited consideration of transactions substantially similar to other transactions for which individual exemptions have been recently provided, DOL reported two granted exemptions in 2016, one concerning captive reinsurance and the other concerning sale by a plan of real property.
The individual exemptions that were issued covered a variety of topics, including the following:
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Three exemptions to allow Royal Bank of Canada Trust Company (RBC), Northern Trust Fiduciary Services (NT), and Deutsche Bank AG to continue to act as a qualified professional asset manager under PTE 84-24 notwithstanding criminal convictions (related to tax fraud (in the case of RBC and NT) and violations of certain South Korean financial services and capital markets laws (in the case of Deutsche Bank)). DOL issued similar exemptive relief to Credit Suisse in 2014. (PTEs 2016-10, -11 and -12).
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Three exemptions permitting plans to acquire subscription rights in connection with stock rights offerings from a plan sponsor or an affiliated corporation. (PTEs 2016-05, -07 and -09).
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In connection with a rights offering, an exemption permitting the holding and disposition of rights to unsecured obligations and warrants for stock of the parent company, a party-in-interest. The context for this exemption was a large complex transaction. (PTE 2016-06).
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In-kind contributions of publicly traded common stock to a plan by a party-in-interest. (PTE 2016-08).
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Cash sale by a plan of two commercial buildings to a union, a party-in-interest to the plan. (PTE 2016-04).
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Cash sale of unimproved real property by the individually directed account in a plan to the plan trustee and participant in the plan. (PTE 2016-03).
In addition, as corollaries to the Fiduciary Rule, DOL issued Class Prohibited Transactions Exemptions 2016-01 and 2016-02. These are, respectively, the Best Interest Contract Exemption and Class Exemption for Principal Transactions. For a discussion of these exemptions, please see Sutherland’s Fiduciary Rule website at www.dolfiduciaryrule.com.
The attached chart is an index with brief descriptions of the 2016 individual exemptions and links to the publication of the granted exemptions.
