The Pension Protection Act of 2006 (Pub. L. No. 109-280) mandated that the Department of Labor issue about 25 regulations in 2007. Therefore, most of the guidance expected from DOL's Employee Benefits Security Administration is likely to implement the PPA.

The Department of Labor's Employee Benefits Security Administration is “very busy” working on many new Pension Protection Act required regulations and other guidance, Bradford P. Campbell, acting assistant secretary for employee benefits security, told BNA Dec. 27.

“In total, we estimate that we will have to issue approximately 25 rulemaking items between now and early 2008,” Campbell said in written responses to questions submitted to him by BNA.

“One of our top priorities [in 2007] is implementing the PPA through regulations and guidance,” Campbell said. “It is critically important that these crucial reforms are implemented in as clear and timely a manner as possible to improve the retirement security for America's workers, retirees, and their families,” he said.

However, pension practitioners expressed concern over the number of regulations required by the PPA over a very short period of time and one practitioner told BNA that the department's task is a “nearly impossible task.”

'Nearly Impossible Task.'

“The PPA placed the department in the nearly impossible task of issuing so many regulations in such a short period of time, particularly for defined contribution plan ... provisions effective upon enactment or beginning in 2007,” Ed Ferrigno, vice president of Washington Affairs for the Chicago-based Profit Sharing/401(k) Council of America, told BNA Dec. 29. “This has resulted in significant anxiety in the plan community,” Ferrigno said.

“It's not a question of whether or not the department is up to the task--I don't think any agency can meet these deadlines,” Ferrigno said.

“No question about it, the department has a challenging and aggressive agenda, but the issues are important ones,” Andree St. Martin, employee benefits law practitioner with Washington, D.C.-based Groom Law Group, told BNA Jan. 3. “It will be especially important that the department and the industry (both plan sponsors and providers) have an open channel of communication so that the department may benefit from the experience of sponsors and providers as it develops its proposals on a fast track,” she said.

“It will be very difficult for the department to publish in a timely manner all of the rulemaking projects under its jurisdiction required by the PPA,” Jan Jacobson, director of retirement policy for the Washington, D.C.-based American Benefits Council, told BNA Dec. 28. “It will be even more difficult, however, for the industry to implement all of those regulatory requirements when they are released,” she said.

Jacobson also expressed serious concern about the department proposing substantial changes to the Form 5500 Annual Return/Report of Employee Benefit Plan in addition to the PPA changes. She said these changes will require plan sponsors to “make drastic systems changes” necessary to implement the PPA changes at the same time as Form 5500 reporting requirements.

Brian Graff, executive director of the Arlington, Va.-based American Society of Pension Professionals and Actuaries, told BNA Dec. 28 that he agrees with such concerns.

“They are up to the task if they stick to the basics and do not try to make new law,” Dallas Salisbury, president of the Washington, D.C.-based Employee Benefits Research Institute told BNA Jan. 3, taking a view somewhat contrary to that of other practitioners. “Most of the PPA changes for defined contribution plans are optional for sponsors, so the system has time to adjust,” he said.

PPA Regulations and Guidance.

The regulations to be promulgated in 2007 will address such PPA related issues as automatic enrollment and default investments, fiduciary rules governing the selection of an annuity contract for defined contribution plan distributions, and fee disclosure, Campbell said. He also mentioned the increased interest in alternative investments and fiduciary responsibility associated with such investments.

The PPA contains provisions that would benefit from Congressional correction and modification, Campbell told BNA, specifically identifying the statutory exemption for investment advice as one example of something that needs to be addressed in a PPA technical corrections bill.

In addition to the PPA related regulations, EBSA has determined a need for regulatory action not expressly mandated in the PPA, Campbell said, such as an all-electronic filing system.

The agency continues to treat enforcement and participant assistance as agency priorities and will continue to do so in 2007, Campbell said.

The Pension Protection Act.

According to Campbell, the PPA is the most comprehensive revision to the rules governing retirement plans since the Employee Retirement Income Security Act was enacted in 1974.

The PPA replaces the funding requirements for defined benefit pension plans, imposes new benefit limits on underfunded plans, and changes the premiums that the sponsors of underfunded plans must pay to the Pension Benefit Guaranty Corporation to insure a minimum level of benefits to their participants (151 PBD, 8/8/06; 33 BPR 1899, 8/8/06).

Also, the PPA extends certain tax incentives for retirement savings, modifies tax provisions relating to spending for health care, establishes a safe harbor for employers to provide investment advice to help employees manage their tax code Section 401(k) accounts, and provides for automatic enrollment of employees in 401(k) plans. The bill also clarifies the legal standing of cash balance pension plans.

The provisions of the PPA are expected to have significant effects on the administration and structure of benefit plans and the manner in which plan fiduciaries operate.

“The biggest impact on the retirement industry will be as a result of guidance related to [investment] fees expected in 2007,” ASPPA's Graff said.

“Disclosure of indirect payments like revenue sharing are certainly going to make industry players evaluate how they conduct business,” Graff said.

Default Investment Changes Certain.

“I'm certain that we will make some changes to the proposed regulation based on the public comments,” Campbell said, in response to about 100 comments on the proposed rule on default investment requirements in plans where employees are automatically enrolled, received from individuals, employee benefits practitioners, trade groups, financial institutions, and members of Congress (221 PBD, 11/17/06; 33 BPR 2713, 11/21/06).

Comments on the proposed rule centered on provisions regarding qualified default investment alternatives, advance notice requirements, and fee issues of the proposal.

“The comments were very thoughtful and detailed,” Campbell said. “We are working our way through them, considering them carefully, and making decisions about the issues they raise,” he said.

“We have a statutory deadline of February 13, 2007, and EBSA's staff is working hard to publish the final regulation as close to that date as possible, consistent with the legal requirements of the regulatory process,” Campbell said.

EBSA analysis suggests that automatic enrollment plan designs increase worker participation rates from approximately two-thirds to as much as 90 percent or higher, allowing many more workers to benefit from the compounding effect of long-term retirement savings, according to Campbell.

Qualified Default Investment Alternatives.

PPA Section 624(a) amended ERISA Section 404(c) by adding a new ERISA Section 404(c)(5) to provide relief accorded by Section 404(c)(1) to fiduciaries that invest participant assets in certain types of default investment alternatives in the absence of participant investment direction. Under the proposed regulation, a fiduciary would not be liable for any loss as a result of automatically investing a participant's account in a QDIA, provided certain conditions are met.

However, the fiduciary would remain liable for the selection and monitoring of a qualified default investment alternative. The proposed regulation would provide fiduciary relief, advance notification to participants and beneficiaries, qualified default investment alternatives, three types of investment products, preemption of state law pertaining to withholding from an employee's paycheck without the employee's express consent, and civil penalties.

Many plan sponsors have already selected default investment options in connection with automatic enrollment features, or for other undirected amounts, Groom's St. Martin said. Some are investing undirected contributions in options that will not ultimately qualify, she said.

“Once final rules are effective, these sponsors want to qualify for fiduciary relief in connection with previously defaulted contributions as soon as possible in the most cost-effective manner,” St. Martin said.

She also noted that plan sponsors are concerned about how to achieve fiduciary relief in connection with default investments once final regulations are effective. They are also concerned about complying with their fiduciary duty to keep administrative and transaction costs associated with transitioning default investments to a qualified default investment alternative to a reasonable level, St. Martin said.

“ It is important that the department clearly address how the conditions of the regulation apply in transitions involving previously defaulted amounts in both QDIA and non-QDIA defaults,” St. Martin said.

“I hope they will do a final regulation that does not serve to discourage plans from being sponsored and that does not stifle future innovation,” EBRI's Salisbury said. “Sponsors that believe they are best off with money market or stable value due to particular workforce characteristics should not be pushed through extra hoops to do so,” he said.

“Current products should not be enshrined but characteristics of choice [should be] stressed,” Salisbury said.

Political Pressure for Changes.

Possible changes to the automatic enrollment/default investment proposed rule are “likely based on the political pressure being put on [the department and the agency] by Congress,” ASPPA's Graff said.

He was referring to a letter from Rep. George Miller (D-Calif.), chairman-designate of the House Education and Workforce Committee, to EBSA's Campbell, expressing concern regarding limitations on fiduciary responsibility related to the proposed rule on automatic enrollment and default investments (242 PBD, 12/20/06; 34 BPR 13, 1/2/07).

Another letter, this one from Rep. Earl Pomeroy (D-N.D.) to Secretary of Labor Elaine L. Chao, called for a broader array of safe harbor default investments than that outlined in the proposed rule (244 PBD, 12/22/06; 34 BPR 11, 1/2/07). The letter, among other things, also requested clarification that state withholding laws, a number of which could prohibit automatic enrollment, are preempted by ERISA.

It also is important not to disrupt the successful expansion of pension coverage achieved by companies that previously adopted automatic enrollment arrangements, the letter said. It is critical that the preemption apply regardless of the type of default investment and that reasonable, prudent default investment options already chosen by these companies for existing participants be accorded safe harbor protection.

Practitioners Request Changes.

Some of the very best and most cost effective plan investments are managed directly by sophisticated large employers, PSCA's Ferrigno said. The proposed rule prevents these employers from directly managing a qualified default investment, he said.

“We have asked that the final rule permit employers, as fiduciaries, to manage a QDIA,” Ferrigno said.

The proposed 30-day participant advance notice for automatic enrollment would prevent immediate automatic enrollment of new hires, Ferrigno said. PSCA has joined the chorus in asking for more flexibility in this situation, to include money market and stable value investments as a default investment, he said.

“Preexisting automatic enrollment plans need the preemption of state wage withholding laws to be broadened from the proposed rule,” ABC's Jacobson said. The proposed rule appears to limit preemption to plans that use the new QDIAs but does not clearly assist plans already in place, she said.

“Sponsors of preexisting plans that use a default investment that is not a QDIA, regardless of whether the investment is a prudent default investment, worry that they may lose the preemption argument,” Jacobson said. “The Council has encouraged the department to clarify that preemption applies to a broader range of investments and would like to see it applied to any prudent default investment,” she said.

Annuities for Defined Contribution Plans.

Annuities can be an effective way for workers to convert some or all of their retirement plan accounts into a stream of income so they can manage the risk of outliving their savings, Campbell said.

Deciding whether to offer an annuity as a distribution option is a fiduciary act subject to ERISA's fiduciary standards, Campbell said.

The PPA requires a regulation that clarifies the fiduciary rules governing the selection of an annuity contract for defined contribution plan distributions, Campbell said. “We are currently working on this regulation, and will publish a proposed regulation in the spring,” he said.

The PPA requires the final regulation to be promulgated by Aug. 17, 2007, Campbell said.

“It's important that the guidance not suggest that a plan fiduciary must select the 'highest rated' issuer, but confirm that ratings are an important factor in the selection,” St. Martin said.

“In addition, the department's guidance should distinguish between annuity contracts intended as distribution options and those 'hybrid' arrangements that include the annuity feature but primarily are investment products.

PBGC PPA Agenda Is Proceeding, Official Says “The Pension Benefit Guaranty Corporation is proceeding with its 2007 [PPA] agenda as outlined by Interim Director Vincent K. Snowbarger in his interview with BNA,” a spokesman for the agency told BNA Jan. 4. The agency is working on regulations expanding the missing participants program and on paying interest on premium overpayment refunds, Snowbarger told BNA during an interview in the agency's Washington, D.C., office on Sept. 19 (182 PBD, 9/21/06; 33 BPR 2265, 9/26/06). The PPA changed those two areas and will require regulations, Snowbarger said during the interview. About 21 sections of the PPA have an effect on PBGC, but only those two areas require regulations, he said. “There are plenty of things that we want to do and there are two things that we have to do,” Snowbarger said during the interview. Other PPA provisions PBGC will address include limits on the PBGC guarantee of shutdown benefits, single employer plan elections to become multiemployer plans, and possible input on a technical corrections bill, Snowbarger said during the interview.

There is a lot of confusion about the existing “safest available annuity” rule which clearly permits cost considerations among qualified annuities, PSCA's Ferrigno said.

A quarter of defined contribution plans offer annuities now, and the take-up rate is extremely low, Ferrigno said. “We think that new innovative products and more completive and transparent pricing is the answer to the annuity issue,” he said.

“Anything the department can do in these two areas will be helpful,” Ferrigno said.

“Alternative investments sometimes have limited transparency which would make it difficult for a small or medium plan sponsor,” EBRI's Salisbury said. “Options that require an investment consultant to monitor become the realm of large plans that can spread costs broadly,” he said.

The department's Interpretive Bulletin 95-1 requires employers seeking to purchase annuities for retirement benefits to select the safest available annuity provider (22 BPR 583, 3/6/95). The safest available annuity standard is more rigorous than the “prudence” standard in other parts of ERISA.

Advisory Opinion 2002-14A, clarified how the existing guidance on selection of annuity providers for purposes of pension plan benefit distributions applies to defined benefit and defined contribution plans (247 PBD, 12/27/02; 29 BPR 3267, 12/31/02). The opinion clarified existing guidance concerning cost considerations, among other things.

The safest available annuity provider standard was developed in response to a series of events specific to the defined benefit pension plan sector. The advisory opinion says in a defined contribution context it is okay for a plan fiduciary to consider costs because cost is going to reduce the actual participant distribution.

Fee Reporting Changes Are Coming.

“I am certain we will make some changes,” Campbell said, referring to comments received on proposed fee initiatives, which are currently under evaluation at the agency.

Improving fee disclosure to plans and participants is a “top priority,” Campbell said. The EBSA is currently pursuing several initiatives focused on improving the transparency of fee and expense information at both the plan fiduciary and the participant level, he said.

In July of 2006, the agency published proposed changes to Form 5500 that included significant improvements in transparency of plan-related fees and expenses, Campbell said (139 PBD, 7/21/2006; 33 BPR 1717, 7/25/06). The proposed changes are intended to assist plan officials in assessing the reasonableness of compensation paid for services and potential conflicts of interest that might affect those services.

“To the extent that the final Form 5500 changes include a requirement to report third party payments to plan service providers (e.g., revenue sharing payments), the department must clarify that such revenue sharing payments are not 'plan assets,' ” Steve Saxon, with the Washington, D.C.-based Groom Law Group's practice group on ERISA fiduciary responsibility, told BNA.

“Without this clarification, plan administrators will not know whether the plan must also report revenue-sharing payments on the plan's [Form 5500] Schedules H [financial information] and G [financial information for small plans],” Saxon said. “Previous guidance indicates that the department has never considered revenue-sharing payments to be plan assets,” he said.

“It is important the department clarify that any new reporting requirement does not signal a reversal in the department's previous analysis,” Saxon said.

A second fee-related project is to amend the regulations relating to Section 408(b)(2) of ERISA, Campbell said. This section of ERISA addresses exemptions for contracting or reasonable arrangements for services for reasonable compensation with a party in interest.

“Our intent is to ensure that service providers entering into contracts with plans disclose to plan fiduciaries information concerning the providers' direct and indirect compensation and other financial arrangements sufficient for fiduciaries to assess both the reasonableness of the compensation being paid by the plan and potential conflicts of interest,” Campbell said.

This information is critical for a plan fiduciary to fulfill his or her responsibilities under ERISA, Campbell said. A proposed regulation is expected to be published in the spring, he said.

A third fee-related project involves improving the disclosure of plan fee and expense information to workers in participant-directed individual account plans, Campbell said. Because plan and investment-related expenses are often charged against the account of the individual participant, understanding these expenses is of critical importance to workers, he said.

All Electronic Filing System for 2008.

Another agency priority for 2007 is the EFAST2 project, Campbell said, referring to a final rule requiring the electronic filing of Form 5500 for plan years beginning on or after Jan. 1, 2008 (139 PBD, 7/21/2006; 33 BPR 1717, 7/25/06).

The current EFAST system (ERISA Filing Acceptance System) processes approximately 1.2 million Form 5500s filed by plans, is primarily paper-based, and is nearing the end of its useful lifecycle.

The final rule requiring the electronic filing of Form 5500 said the department annually receives and processes approximately 1.4 million filings with EFAST. For the 2002 plan year, EFAST filings translated into approximately 25 million paper pages, the final rule said.

The EFAST system, which was developed in 1998 and 1999, relies on a mixture of paper and electronic filing options and computerized processing methods to accept, compile, and monitor the Form 5500 filings, the final rule said.

In the president's fiscal year 2007 budget, the department has requested funding to replace this system with an all-electronic system (EFAST2) that will be faster, more accurate, and much less expensive to operate than the current system, Campbell said.

“The Council hopes the department delays implementing adaptations to the Form 5500 filing requirements,” ABC's Jacobson said.

“The 5500 changes are proposed to be effective at the same time as most of the PPA requirements, creating a bottleneck for necessary systems adjustments,” Jacobson said. “Current technology generally is not capable of providing the plan-level detail necessary to make the proposed filing,” she said.

PPA Technical Corrections Bill.

“As with any major, newly passed legislation, the PPA contains provisions that would benefit from correction and modification,” Campbell said.

“We have provided the [Congressional] committee staffs with our thoughts on these, and we expect that there will be more discussions with them in the future,” Campbell said.

Some of the provisions, such as the statutory exemption for investment advice, are very complex, and the agency continues to evaluate what issues require legislative adjustment, and what issues can be addressed via regulations or guidance, Campbell said.

A technical corrections bill will probably happen in 2007, ASPPA's Graff said. However, such a bill would be limited and very technical in nature. It is not likely to address any policy issues, he said.

There is a lot of talk about changes to the advice provision, technical or otherwise, PSCA's Ferrigno said. “I can't imagine this happening in the new Congress,” he said.

“I am not optimistic that there will be clean correction bill in the 110th Congress, and any bill that is produced is very likely to be opposed by the plan sponsor community and/or the entities affected by any revenue offsets,” Ferrigno said.

Alternative Investments and Fiduciary Responsibility.

There has been increased interest in alternative investments, particularly in hedge funds, in recent months, Campbell said. This interest has largely focused on the regulation of hedge funds under federal securities laws, though some have also asked about hedge fund investments made by pension plans.

Among its other provisions, ERISA governs the conduct of private sector plan fiduciaries in making investment decisions, Campbell said. ERISA does not generally regulate the investment vehicles in which plans invest, as these are generally regulated under securities law and by federal and state financial regulators, he said.

Campbell noted that there is an exception for investment vehicles that derive more than 25 percent of their assets from ERISA plans, individual retirement accounts, and certain other sources. These “plan asset vehicles” are subject to ERISA, he said.

In making any investment, the plan fiduciary is obligated to act solely in the interests of the participants and beneficiaries, to invest prudently, and to diversify investments to avoid large losses, Campbell said.

The fiduciary must gather the information necessary to understand the nature of the investment (risks, investment strategy, fees, etc.), and must periodically monitor the investment to evaluate whether it remains a prudent plan investment, Campbell said. The fiduciary is personally liable for losses resulting from a breech of these duties, he said.

After evaluating all of these factors with respect to the facts and circumstances of their plan, ERISA does not prohibit plan fiduciaries from investing in hedge funds, Campbell said. By requiring prudence and diversification, and by making fiduciaries personally liable, ERISA ensures that fiduciaries protect the interests of participants and beneficiaries in making investment decisions, he said.

Alternative investments, such as hedge funds, present unique challenges for employer-provided pension plans, according to some practitioners (153 PBD, 8/10/06; 33 BPR 1935, 8/15/06). Such funds carry a higher risk than other funds, such as stock and bond portfolios, and are more suitable for defined benefit pension plans than for defined contribution pension plans.

Private equity and hedge funds involve a number of nuances that plan fiduciaries need to consider and plan fiduciaries should seek expert advice in evaluating and selecting such alternative investments, according to some practitioners.

Need for Clarification.

The final investment advice compromise in the PPA does need clarification before new investment advice programs are developed that rely on it, Jon W. Breyfogle, ERISA compliance practitioner with Washington, D.C.-based Groom Law Group, told BNA. “For example, we would like to see the department clarify that the 'fee leveling' condition only applies to the entity that controls the advice given. So, if an individual determines what securities are recommended to plan participants, that individual must not receive varying compensation based on the advice provided, but their employer, such as a securities firm, could receive different fee payments,” he said.

Breyfogle also said the department needs to clarify certain aspects of the computer model condition. “If the department either can't or won't clarify these issues, then Congress might have to,” he said.

“However, these issues are likely to be seen as more than 'technical' and it would be an uphill climb to get them clarified in a technical corrections measure,” Breyfogle said.

“I think a lot of the problem is that the use of hedge funds is not well understood,” Lynn Dudley, ABC vice president of retirement policy, told BNA. “Large companies are generally very sophisticated and do not need additional protections and small companies do not participate in the funds as often,” she said.

“I think we want to continue working with Congress and the regulators to help them understand the role for hedge funds--they are often used to control volatility,” Dudley said.

Compliance Assistance and Enforcement.

“Enforcement and participant assistance are top priorities critical to our mission,” Campbell said.

Approximately two-thirds of EBSA's staff is dedicated to enforcement and participant assistance, Campbell said.

The agency will continue to promote the voluntary fiduciary correction program, the delinquent filer voluntary compliance program, and will continue to hold seminars across the country for its fiduciary education program.

In fiscal year 2006, EBSA recorded over $1.4 billion in monetary results for employee benefit plans due to its enforcement, assistance, and voluntary compliance activities, Campbell said.

In the enforcement area, agency national priorities include health fraud and multiple employer welfare arrangements, Campbell said.

The agency continues to find instances where MEWAs have been unable to pay claims as a result of insufficient funding, or in the worst situations, where they were operated by individuals who drained the MEWA's assets through excessive fees or by outright theft, Campbell said.

“Our emphasis is on abusive and fraudulent MEWAs created by unscrupulous promoters who sell the promise of inexpensive health benefit insurance, but default on their obligations,” Campbell said.

Another priority continues to be the Employee Contributions Project, where the focus is on situations in which employers delay forwarding employee contributions to their retirement plans, Campbell said.

“We take these violations very seriously to prevent losses to workers from theft or bankruptcy, and if we find a violation we take action to enforce the law,” he said.

“The current [employee contributions] standard is gray,” ASPPA's Graff said. ASPPA would support a safe harbor as an effective means for addressing compliance concerns in this area, he said.

“If you had a specific number of days [to forward employee contributions], people would have a specific target to shoot for,” Graff said.

By Michael W. Wyand

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The EBSA Web address is http://www.dol.gov/ebsa/.