Tag: DOL

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Retirement Plans

Is Socially Conscious Investing a Breach of Fiduciary Duty?

Socially Conscious Investing
Socially Conscious Investing

On June 23, 2020, the Department of Labor issued a proposed rule addressing the circumstances under which a fiduciary of a qualified retirement plan can base investment decisions on socially conscious factors.

What is Socially Conscious Investing?

Socially conscious investing, otherwise known by the acronym ESG, is a form of investing designed to promote social goals.  Under an ESG strategy, an investor screens potential investments based on environmental, social and governance criteria.  Environmental criteria consider how a company’s business practices treat the environment.  Social criteria consider how a company manages its relationship with its employees, customers and its community.  Governance criteria considers a company’s management practices, such as executive pay and shareholder rights.

Under What Circumstances is ESG Investing Allowed?

The proposed rule reiterates that the purpose of a qualified retirement plan is to maximize the retirement benefits of the plan participants.  To that end, investment decisions must be made with one goal in mind – maximizing investment performance.  Because ESG subordinates investment returns to non-financial objectives, it may run afoul of the fiduciary standard set forth in ERISA.

The proposed rule makes five points:
  1. ERISA requires plan fiduciaries to make investment decisions based on financial considerations “relevant to the risk-adjusted economic value of a particular investment or investment course of action”.
  2. ERISA’s “exclusive purpose” rule prohibits a fiduciary from subordinating the interests of plan participants in retirement income to non-pecuniary goals.
  3. A fiduciary must consider all investments available to meet their duty of prudence and loyalty under ERISA.
  4. ESG factors in investment decisions can be a valid pecuniary consideration if required economic analysis establishes that the ESG investment presents economic risks or opportunities that a qualified investment professional would find acceptable.
  5. A 401(k) plan may provide designated investment alternatives.

In announcing the proposed rule, Secretary of Labor Eugene Scalia said that:

Private employer-sponsored retirement plans are not vehicles for furthering social goals or policy objectives that are not in the financial interest of the plan.  Rather, ERISA plans should be managed with unwavering focus on a single, very important social goal: providing for the retirement security of American workers.

Categories
Business Insurance Health and Benefits Technical Memorandum

What Employers Should Know About Labor Department’s Guidance On Families First Coronavirus Response Act

DOL
DOL

On March 24, 2020, the Department of Labor (DOL) issued an FAQ to provide guidance for the Families First Coronavirus Response Act (the “Act”). This is their first effort at answering some questions.

What do we know from this guidance?
1) Paid Leave Provisions Begin April 1st

The Act’s paid leave provisions are effective April 1, 2020, and will extend to December 31, 2020.

This is slightly interesting in that the Act says it will become effective April 2, 2020. The FAQ provides no explanation for why the DOL changed the effective date of the Act’s provisions.

It says the relevant date for making this determination is the date that an employee requests leave under the Act.

So, for example, if, on the date that Jim asks for leave under the Act, the employer has 505 employees, Jim is not eligible for paid leave under the Act.

However, if, a week later, when John asks for leave, the employer has 495 employees, then John is eligible for leave under the Act.

2) Independent contractors are not covered under the Act

If an employer has multiple locations, employees in all locations are considered when tallying the total number.

However, if a corporation has an ownership interest in another corporation, the corporations are generally treated as separate entities, unless they are considered joint employers under the Fair Labor Standards Act.

3) The Act Only Applies For Businesses With Under 500 Employees

The FAQ makes clear that the Act does not apply to employers with more than 500 employees.

4) Fewer Than 50 Employees May Be Exempt

Employers with fewer than 50 employees may be exempt from the requirements of the Act. The criteria for the exemption will be addressed in the regulations.

5) Part-Time Employees Are Entitled To Benefits

A part-time employee is entitled to be paid for the average number of hours worked. You calculate their paid leave period based upon the number of hours that the employee is normally scheduled to work. If the normal hours are unknown or the employee’s hours fluctuate, then you can use a 6-month average.

6) Sick Pay and Overtime Are Included, With Capped Hours

When calculating sick pay, overtime hours are included. However, the amount of hours are capped at 80. So, if an employee is scheduled to work 50 hours in one week, you can pay for 50 hours for that week. But, the employee can only be paid for 30 hours the next week.

7) Family And Medical Leave Sick Pay Is Calculated Differently

The payment rates for paid sick leave and family and medical leave under the Act are different. So, it is important for you to determine under which part of the Act the employee seeks to qualify. An employee receiving sick pay is entitled to full pay with a cap of $511 per day. An employee taking family and medical leave is entitled to two-thirds of normal pay.

8) Benefits Are Not Retroactive

The Act is not retroactive. However, it provides a new and separate benefit. So, an employee who took sick pay before April 1, 2020, is still eligible to take sick pay under the Act after April 1, 2020.

We will provide more information as it becomes available from the Department of Labor.

Not sure how these changes affect your company?

Leave a comment below or contact us with your questions.

Categories
Technical Memorandum

Fiduciary Rule is Dead [Technical Memorandum]

Technical Memorandum
RMC Group

On March 15, 2018, in a group of consolidated cases known as Chamber of Commerce of the United States of America, et al v. United States Department of Labor, the United States Court of Appeals for the Fifth Circuit held that the Department of Labor (DOL) exceeded its authority when it issued the Fiduciary Rule and vacated the Fiduciary Rule in its entirety. On May 7, 2018, DOL issued Field Assistance Bulletin No. 2018-02, which many commentators are interpreting as an indication that DOL will not appeal the Court’s ruling. So, what does this mean for the employee benefits profession?

In technical terms, it means that life goes back to the way it was before April, 2017. The definition of the term “fiduciary” under ERISA reverts to the definition that had existed since 1975, when DOL promulgated a five-part test to determine whether a person is a fiduciary. As described by the Court, under that test, a person is a fiduciary if he:

1.         renders advice . . . or makes recommendations as to the advisability of investing in, purchasing, or selling securities or other property;

2.         on a regular basis;

3.         pursuant to a mutual agreement . . . between such person and the plan;

4.         the advice serves as a primary basis for investment decisions with respect to plan assets; and

5.         the advice is individualized . . . based on the particular needs of the plan.

The Fiduciary Rule revised the definition of “fiduciary” by removing two important elements. First, it eliminated the requirement that advice be provided on a “regular basis”. Second, it eliminated the requirement that the advice be the “primary basis” for investment decisions. This turned the role of fiduciary from a relationship to a transaction. In other words, prior to the Fiduciary Rule, a fiduciary was a person who had a long-standing relationship of trust with a client and upon whose advice the client regularly and primarily relied. Under the Fiduciary Rule, a person who worked with a client in a single transaction and did not have a relationship of trust or was not the person upon whom the client regularly relied for investment advice could be a fiduciary. This is no longer the case.

The Court’s ruling also eliminates the Best Interest Contract Exemption and reverses the amendment to Prohibited Transaction Exemption No. 84-24 (PTE 84-24). Under the Best Interest Contract Exemption, persons who might not otherwise meet the definition of “fiduciary” had to sign a written contract in which they agreed to be treated as a fiduciary and agreed to be subject to suit in state court. The amendment to PTE 84-24, removed indexed annuity contracts from the exemption. In addition, both required that an advisor adhere to the “Impartial Conduct Standards”. Vacating the Best Interest Contract Exemption, as well as the amendment to PTE 84-24, means that an insurance agent or financial planner does not have to sign a written contract with a client pursuant to which he or she agrees to assume the role of fiduciary and submit to suit in state court. It also means that indexed annuity contracts will be treated the same as fixed annuity and life insurance contracts for purposes of the prohibited transaction exemption. Most importantly, it may mean that an advisor is no longer subject to the Impartial Conduct Standards. 1

As a practical matter, however, the Court’s decision may have much less impact. The Impartial Conduct Standards requires an insurance agent or financial planner to:

1.         act in the best interest of the client;

2.         receive no more than reasonable compensation; and

3.         make no materially misleading statements.

Most insurance professionals and financial planners have followed the foregoing standards of conduct for many years, even before they were announced by DOL. While the Court’s decision may have vacated the mandate of the Impartial Conduct Standards, it will not change the way most insurance agents and financial planners conduct their business.

The most important effect of the Court’s opinion, and DOL’s apparent decision to not appeal, may be to remove a psychological impediment to proposing a qualified retirement plan to your client. The Court recognized the importance of retirement planning and the vital role that an experienced and knowledgeable insurance agent can play. The Court also recognized that insurance and annuity products are an important component of a well-designed plan and that Americans should not be deprived of the support of insurance professionals.

1 It is not clear from FAB 2018-02 whether DOL will still attempt to enforce the Impartial Conduct Standards in some other form of guidance.
Categories
Compliance Update

Department of Labor Request [Compliance Update]

Compliance Update

On July 6, 2017, the Department of Labor (DOL) will issue a Request for Information Regarding the Fiduciary Rule and Prohibited Transaction Exemptions (RFP).  In the RFP, the DOL says that the retirement industry has responded to the Fiduciary Rule with innovations designed to reduce the likelihood of conflicts of interest.  As a result, the DOL has determined that it would be helpful to seek public input that could form the basis of new exemptions or changes to the Fiduciary Rule and the currently existing Exemptions in response to these and other potential innovations.  The RFP also seeks input on whether a further delay of the January 1, 2018, implementation date would be helpful to this process.

CLICK HERE for the full update.