Posts in Regulatory Issues
Groups Say SEC’s Best Interest Proposal Fails to Provide Uniform Fiduciary Standard

Many groups and regulatory officials feel as though the SEC’s ‘best interest’ proposal “fails to impose a uniform fiduciary standard.”  Xavier Becerra, California’s Attorney General, calls the proposed rules “toothless” because emphasis is placed on “disclosure instead of preventing conflicts of interest”. Additionally, many groups feel as though the SEC did a poor job by leaving key terms, such as ‘best interest’, undefined. Throughout this article, organizations such as AARP, FPA, PIABA comment on the proposal and offer their recommendations on ways to clear up some of the ambiguity surrounding the new rulings. Click here to read the full article.


Reflections on a Dramatic Year for Retirement Plan Regulation

This article dives into the implications of the "Department of Labor (DOL) fiduciary rule being vacated by the 5th U.S. Circuit Court of Appeals." This decision has brought a sense of confusion among retirement plan sponsors as they attempt to manage and maintain relationships with their service providers.

Furthermore, this article concludes on the subject of missing participants and mentions how "they often find plan sponsors at fault for not making a good faith effort to locate them."

Click here to learn more about what's happening in retirement plan regulation.


Senate Finance Committee Tax Proposal Takes Aim at Governmental 457 Plan Features

On Thursday, November 9, legislation to overhaul the U.S. tax system moved forward in the House and was introduced in the Senate. While the House version largely left governmental defined contribution plans alone, the Senate version would repeal some unique features of 457 plans, including the exemption from the 10% penalty for early disbursements. Click here to read the NAGDCA Alert.  

SEC Approves Tighter Money-Fund Rules

U.S. regulators approved rules intended to prevent a repeat of an investor exodus out of money-market mutual funds during the financial crisis, addressing one of the biggest unresolved issues from the 2008 meltdown. The plan will allow funds to temporarily block withdrawals in times of stress. Click here to read the Reuters release on the reform rules.  

IRS Issues Post-Windsor Guidance for Qualified Plans

On April 4, 2014, the IRS issued Notice 2014-19 as a follow-up to Revenue Ruling 2013-17 regarding the Supreme Court’s decision in the U.S. v. Windsor DOMA case. The Notice defines the Effective Dates, provides clarification on Plan Definitions and the Timing of Plan Amendments. Please click here to see a brief from the National Association of Plan Advisors on the release of the Notice.   

What Does the DOMA Decision Mean for Employer-Sponsored Benefit Plans?

Following the Supreme Court’s holding that Section 3 of the Defense of Marriage Act (DOMA) is unconstitutional, employers will need to review their retirement plans to identify all provisions applicable to spouses of employees. There needs to be significant clarification on a number of points prior to understanding the complete impact of this decision. Click here to read an article on the possible impact of the decision on employer sponsored plans.  

Interesting Perspective on the Financial System

The issues surrounding mortgage foreclosures and the credit markets have generated a renewed interest in additional oversight of the financial industry.  Whether or not you agree that additional oversight is warranted, the attached article might be of interest.  Written by Peter Goodman and appearing in last weekend's New York Times, it reflects on how Milton Friedman would have potentially reviewed the situation.  The article is available by clicking on this link.

If you have any questions or comments, feel free to e-mail me at

PIMCO's Bill Gross Offers his "Populist, Straight-Talking" Views

As chief fixed-income manager at PIMCO, Bill Gross is no wallflower when offering his opinions on the credit markets, the Fed and politics.  In his April "Investment Outlook," Gross describes his views on home price declines, the Bear Stearns crisis, and the importance of character in lending. 

The text of Gross' most recent "Investment Outlook" is available by clicking on this PIMCO link.

Revenue Sharing -- Best Practices

Our firm has always believed that revenue sharing payments belong to the retirement plan and should be accounted for in the analysis of fees paid to service providers.  As the Department of Labor concurs with this perspective, some new disclosure requirements are on the horizon.  For additional details, please review the attached article (click here) by Fred Reish, Managing Director and Partner of the Los Angeles-based law firm of Reish Luftman Reicher & Cohen.

If you have any questions or comments, please e-mail me at

Recently Published: "Best Practices for 403(b) Plans"

This article by Richard M. Todd and Wendy J. Dominguez was recently published in Benefits & Compensation Digest, Volume 45, Number 1, January 2008, which is issued by the International Foundation of Employee Benefit Plans (  A reprint of the article may be found by clicking here.

In words of the Internal Revenue Service (IRS) on July 23, 2007, a momentous event occurred in the world of 403(b) plans with the issuance of the first comprehensive set of regulations in 43 years. The final regulations under Section 403(b) of the Internal Revenue Code have been released and take effect January 1, 2009.

The 403(b) plan is only available to nonprofits and government entities, and the large majority of the employers that offer these plans are in education--public schools, grades K-12, colleges and universities--and in the hospital market. The 403(b) plan is on the radar screen of IRS and the legal community.

In some cases, employers, especially public school districts, have considered 403(b)s as supplemental to other plans offered (like defined benefit plans) and have chosen to provide access to any provider licensed to sell a product. Morningstar calls this the "hog wild" model. ...

...The 26th largest U.S. school district took a big step last year by consolidating 55 vendors into a single provider.

"It became quite clear that our employees didn't know what fees they were paying, and the district was concerned about the complexity and prudence of dealing with 55 vendors," said Lorie Gillis, the district's chief financial officer. Although participants were initially concerned having "choice," it is estimated that each participant will save between $10,000 and $100,000 with the new vendor by the time each participant retires. While huge strides were made by the district, not everyone was happy--namely, 54 vendors that were displaced. However, participants no longer have to play the investment guessing game and their employer has acknowledged its responsibility to employees. ...

...For the first time, IRS rules require 403(b) plans to operate according to a written plan document--similar to that of an ERISA 401(k) plan. ... continue reading please click (Reprint).

SEC's RAND Report Outlines Investor Confusion About Broker/Investment Advisor Fiduciary Standards

Commissioned by the SEC, the RAND Corporation recently interviewed over 650 investors, two-thirds of whom were experienced in the financial markets. The study found that investors are unclear about the fiduciary standards between brokers and investment advisors. Part of the problem is the plethora of titles in both types of firms, including financial consultant, investment consultant, investment advisor, pension consultant, etc.  If an "advisor" or "consultant" has a securities license, they can be paid commissions by the product or service that they are recommending. These licensed individuals are required only to follow the standard of investment suitability. However, a registered investment advisor, sometimes also called a "consultant" or "advisor," has the additional duty of loyalty to their client. In other words, registered investment advisors should have no conflict of interests in serving their clients. Brokerage commissions are certainly a significant conflict of interest.  Serving two masters corrupts advice! 

Please see the following press release and links for additional details.

SEC Publishes Text of RAND Report on Investment Adviser, Broker-Dealer Industries

Study Explored Industry, Investor Perspectives on Customer Relationships with Financial Service Providers

Washington, D.C., Jan. 3, 2008 - The Securities and Exchange Commission has received and posted on its Web site the text of the RAND Corporation's final report on practices in the investment adviser and broker-dealer industries.

"The Commission has been anxious to receive Rand's study of the investment adviser and broker-dealer industries, and the nature of their relationships with customers. The report will assist the Commission's efforts to update our regulations to improve investor protections in today's new marketplace," said SEC Chairman Christopher Cox. "Our staff is now studying the report and the potential regulatory implications of its findings."

RAND produced the report under contract with the Securities and Exchange Commission ( The report is the product of more than a year of empirical study and analysis.

Following a March 2007 Court of Appeals decision that overturned a 2005 SEC rule permitting non-adviser broker-dealers to charge fees to investors based on account size, the SEC and RAND agreed that RAND would deliver its final, peer-reviewed report in pre-publication format on Dec. 31, 2007, three months earlier than the contract had originally required. The text of the posted report is final and has been peer-reviewed. Neither the data nor the analysis on which it is based will change. The fully formatted, publication version of RAND's final report is due by March 25, 2008.

Qualified Default Investment Alternative (QDIA) Rules

The Department of Labor has issued Final Regulations regarding the Qualified Default Investment Alternative (QDIA) rules for participant-directed retirement plans, including 401(k) plans.  While providing needed clarification, the Final Regulations also disclose that stable value or money market funds will not qualify.  While there is a limited exception, these capital preservation instruments will not be QDIA alternatives.  A fact sheet on the QDIA rules is available by clicking  here.

If you have any questions, I may be reached at

403(b) Plans Should No Longer Be Ignored

Recently published in INSIGHTS, the Association of Benefit Administrations, Inc. (ABA) Journal, Volume 12, Number 4, Summer 2007, (ABA Journal), by Rich Todd. A reprint of the article may be found at the Innovest Website (Reprint).

The 403(b) plan is on the radar screen of the IRS and the legal community.  Recently, the IRS has targeted 403(b) plans of public school districts to determine their level of compliance with the Internal Revenue Code.  The 403(b) plan is only available to non-profits and governmental entities and the large majority of the employers that offer these plans are in education – public schools, grades K-12, and colleges and universities - and in the hospital market.

In most cases, these employers have considered 403(b)s as supplemental to other plans offered (like defined benefit plans) and many have chosen to provide access to any provider licensed to sell a product.  Morningstar call this the “hog wild” model.  While there may be some cursory criteria to be “approved” by the employers, it is typically an elementary analysis as compared to what a typical retirement plan sponsor is legally required to conduct for ERISA (Employee Retirement Income Security Act) plans such as corporate 401(k) and pension plans.

Fred Reich, a well regarded pension attorney of the firm  Reish Luftman Reicher and Cohen in Los Angeles believes that the hands off approach with 403(b) plans is a big mistake for employers.  “Exempt 403(b) plans and government 457(b) and 403(b) plans are also subject to legal requirements, just not ERISA’s.  Instead, they are subject to the laws of the states in which the plans are established.  Many state fiduciary laws are based on principles similar to those underlying ERISA – such as modern portfolio theory, the prudent man rule, and the use of generally accepted investment principles – and a number of state statutes use language identical to the provisions of ERISA.”

The primary problem is that 403(b) investment costs are extremely high as compared to the 401(k) market where the plan sponsor typically uses one provider for the plan.  Morningstar estimates 403(b) internal costs from 3.75% per year to 4.60% per year.  Although Morningstar’s estimate may be high, fees in this market can at times be almost egregious.  In many cases, the employer/plan sponsor is seemingly ignorant and unaccountable about vendor costs.  However the employee/participant can often feel comfortable since the product was “approved.”

Another common problem is the steep surrender charges that participants may be forced to pay in the event that they change their mind about a product or vendor.  Surrender charges are typically tied to commissions that the salesman receives.  If the participant was to leave the vendor relationship, these charges recoup the vendor for the large commissions paid.  The longer and higher the surrender charge, the more the commission paid to the salesman.

403(b) providers argue that competition brings down prices.  This is absolutely true, but only if the competition occurs at the plan sponsor level.  In a multiple vendor environment, participants lose all economies of scale that come with a consolidated plan level account.  If 403(b) employers actively negotiated on behalf of participants (like 401(k) employers) participants would receive increased services and much lower costs.  Participants could easily save 1% per year in fees by moving from a high cost “retail” solution, most common in the 403(b) market, to an institutional solution.  For a participant saving $5,000 per year for 25 years, a 1% fee savings equals nearly $60,000 – and that is just for one participant.

Services to employees can also be improved in a single vendor environment.  Meetings with employees become less focused on which company is better (or has a better salesperson or has the better food at their meetings), and becomes more focused on education employees which investment vehicles will meet their goals.  This change in focus is significant.  Gone are the rumors and the water-cooler conversations of who is the cheapest vendor, who has the best investment products, and who has the best information.  Replaced is an environment where the employee feels comfortable that they are getting great service and great pricing, and can instead focus on designing the right investment portfolio and achieving retirement goals.

Jefferson County Public Schools, the nation’s 26th largest school district, took a big step last year and consolidated 55 vendors into a single provider.  Lorie Gillis, CFO of Jeffco explained, “it became quite clear that our employees didn’t know what fees they were paying and the district was concerned about the complexity and prudence of dealing with 55 vendors.”  Although participants were initially concerned about having “choice”, it is estimated that each Jeffco participant will save between $10,000 and $100,000 with the new vendor by the time each participant retires.  While huge strides were made by Jeffco, not everyone was happy – namely 54 vendors that were displaced.  However, participants no longer have to play the investment guessing game and their employer has acknowledged their responsibility to their employees.

The time is ripe for employers to revisit their 403(b) plans.  Participants should ask employers about their due diligence process and employers should come to grips with their fiduciary responsibility.