What do you think of our site upgrade?
Hosting an industry conference? Ask us about including it in this ticker?

Exclusive Interview: David Levine: 401k Plan Sponsors Must Separate These Fiduciary Rule Facts from Fiction

Exclusive Interview: David Levine: 401k Plan Sponsors Must Separate These Fiduciary Rule Facts from Fiction
February 21
00:01 2018

David Levine has been selected by his peers for the honor of being listed in the Employee Benefits Law category of the annual Best Lawyers in America listing. He regularly advises on the design and redesign of complex retirement, executive, and health and welfare plans; ongoing, day-to-day counseling of plan sponsors; in-depth compliance reviews of corporate and governmental benefit programs; as well as on products and compliance for retirement and health service providers. David was previously the Chair of the IRS Advisory Committee on Tax Exempt and Government Entities (2011-2013) and is currently a member of the Executive Committee of the Defined Contribution Institutional Investment Association and serves in a number of leadership roles in the American Bar Association Tax Section’s Employee Benefits Committee. Mr. Levine regularly speaks on plan design, fiduciary governance, and legislative issues and contributes a recurring column to NAPA Net — The Magazine. He is recognized in the Chambers USA guide for Employee Benefits & Executive Compensation.

FN: David, welcome to the fabulous world of! As you might have gathered from our previous exclusive interviews, our reader like to know a little bit about the background of our subjects. How did you end up where you are today? Can you share with us a story that inspired you to dedicate your energies in the field of ERISA law?
Levine: Thank you for having me, Chris. I found my way to benefits (and ERISA law specifically) through a combination of luck, opportunity, and choice.

Like most ERISA lawyers, I didn’t go to law school to become an ERISA lawyer. However, as luck would have it, my law school happened to have a great ERISA class taught by one of the early ERISA gurus that sparked my interest.

After law school, I wound up, like many young lawyers, at a big New York corporate law firm doing tax law.  However, while I liked tax, I found the firm’s benefits practice more interesting. When personal reasons led me to look at moving to Washington, DC, it happened that my headhunter mentioned an opportunity at a “benefits boutique” in DC called Groom & Nordberg (now Groom Law Group), so I interviewed at Groom to see if it might be a fit for me. After interviewing, I was fortunate to have a choice of staying in tax at some great DC law firms or going to Groom. I made the choice of Groom and have been in benefits ever since.

FN: Holding aside regulatory changes for the moment, what changes have you noticed within the plan sponsor community over the last decade or so regarding their approach to fiduciary issues, in particular as it relates to the management of their service providers?
Levine: The most significant change – from the smallest of the small to the largest of the large plans – has been sponsors have truly become “advisered-up.” Ten years ago, you could easily find plans that had never had an independent adviser assisting the sponsors and plan fiduciaries with their recordkeepers and other service providers. That has all changed now and, in fact, many segments of plan sponsor market seem fully “advisered”.

Another big change has been just a level of understanding and attention paid to fiduciary responsibilities. Plan sponsors and fiduciaries are now focused – whether or not because of the fact that ERISA litigation and regulation is all over the news – on compliance and fiduciary process more than ever. At times, however, it feels like the greatest challenge plan sponsors and fiduciaries face is cutting through everything they are told to just get to “the basics.”

FN: The DOL’s Conflict-of-Interest (a.k.a. “Fiduciary”) Rule has gotten off to a shaky start. Can you give us a status report of where we stand right now regarding the law? What does this mean to plan sponsors? What should they be doing different than they’ve done before?
Levine: I always worry that when I answer this question one day the answer will be different tomorrow! As of right now, the final Rule that expands who is and what activities are considered “fiduciary” activities for both ERISA plans and IRAs is now in “effect” and “applicable.” What isn’t yet applicable yet are the full, and potentially complex, parts of a number of Department of Labor “prohibited transaction” exemptions that generally allow for money to be paid in a manner that might otherwise violate the Fiduciary Rule. The DOL has transition relief in effect that I often call the “ultralight” version of the Best Interest Contract Exemption, and the DOL is considering other changes to the relief (and possibly the Rule) itself. The big wild card right now is whether the lawsuits that are challenging the Fiduciary Rule itself will succeed. The biggest is the Chamber of Commerce case that everyone is looking to see if the Fiduciary Rule remains intact.

Of course, this uncertainty can be very challenging for plan sponsors. If I have to give some basic words of advice to plan sponsors, I simply say “stop and take a breath.” Right now, the biggest challenge plan sponsors and fiduciaries face is that they have and continue to be presented with changes to existing relationships with advisers, recordkeepers, and other providers that are described as “required by” or “due to” the Fiduciary Rule.  Sorting what is fact from fiction is the greatest focus area I suggest to plan sponsors right now. Luckily, many plan sponsors are well equipped for this world because it simply means enhancing and redoubling their diligence and monitoring of their service providers.

FN: How about the Rule’s impact on service providers? What are the new procedures they should be focusing on right now?
Levine: Service providers face two key items right now.

First, many service providers are relying on the “impartial conduct standards” in the best interest contract exemption transition relief – the “BIC ultralight” I referred to earlier. Although the impartial standards are basically ERISA’s prudence, loyalty, and reasonable compensation concepts in a neat package, service providers should be ensuring that they are documenting how they are satisfying these standards in case of a DOL investigation or lawsuits from plaintiffs’ attorneys.

Two, while we as a firm are not recommending a headlong rush to comply with the exemptions that are on hold because there is a good chance that there will be new exemptions and/or changes to the existing exemptions, service providers are facing a bit of a wild west and should be monitoring how competitors in their market segment(s) are applying the “BIC ultralight.” Also, to the extent that new products are being designed, new products should take into account today’s and potential tomorrow’s regulatory landscapes to ensure that products don’t become outdated overnight.

FN: There’s a fear that, as originally intended, the DOL would take on more of a mentoring role to help fiduciaries comply with the Rule. On the other hand, the DOL would rely on the tort bar (or, as we’ve recently seen with Massachusetts, individual states) to enforce the new Rule. Now it seems the DOL has adopted a “wait and see” approach, yet the Rule is still official. How might this enforcement “hiatus” lead to a false sense of security and actually create fiduciary liabilities for both plan sponsors and service providers?
Levine: Not to rehash my prior answers, but your question hits the nail on the head. I worry less about lawsuits against plan sponsors if they are continuing to focus on their procedural processes and, as they deem appropriate – because there is not just one “right way,” drilling down with their service providers on how the services provided to their plan are changing or being modified due to the fiduciary rule.

For service providers, I definitely think there is a risk that saying “business as usual” without documentation identifying fiduciary (or non-fiduciary status) under the fiduciary rule and additional document supporting the use of the impartial conduct standards creates significant risk for DOL investigations in the future (whether under the current or a future Presidential administration one day) and for additional claims in the wide range of plaintiff’s lawsuits.

FN: Give us an overview of the litigation environment right now. What are the types of cases you see being brought against service providers? Against plan sponsors? Identify what you see as the triggers to these cases? What can sponsors and providers do to avoid these triggers?
Levine: The current litigation environment is much like everyone waiting in a line outside Walmart for the annual day-after-Thanksgiving early Friday morning sale. Plaintiffs firms – from the established big players to smaller and securities law-oriented firms – are all rushing to the courthouse with their latest and greatest cases.

For service provider lawsuits, the growth area we as a firm see are more lawsuits involving products – whether stable value funds, general 3(21) consulting, or other products where multiple service providers are involved in providing services to a plan. Wherever there is a need for a deep pocket available to defend – and settle – a lawsuit (such as an adviser for a 401k or 403(b) plan or a service provider entity with significant resources working on a product) these facts seem to attract the plaintiffs firms. To avoid these lawsuits, continued diligence on contracts, insurance, indemnities, and disclosure can be strong tools to minimize exposure.

The plan sponsor lawsuits continue to try to focus on sponsors that are allegedly “asleep at the switch” when running their plans. For plan sponsor lawsuits, strong, documented processes that evolve with the litigation and regulatory landscape can help mitigate risk significantly.

FN: The SEC has recently indicated they will be pursuing their own Fiduciary Rule. What are the potential advantages and disadvantages with the SEC starting from scratch and not “harmonizing” with the DOL Rule? On the flip side, what dangers does “harmonization” pose?
Levine: Any time a regulator starts a large regulatory process, there is a lot of uncertainty and the impact – whether good or bad – can be hard to determine.

If the SEC implements a “start from scratch” approach without harmonization there is always a risk that advisers subject to DOL and SEC regulation will not be able to satisfy both sets of rules at the same time. Also, because the SEC’s jurisdiction is, in some way, more narrow than the DOL’s ERISA Fiduciary Rule, there could be inconsistent regulatory frameworks depending on whether you are a broker, RIA, insurance sales agent, or in some other capacity.

If the SEC focuses on “harmonization” the SEC’s ability to make significant changes to the Fiduciary Rule framework may be significantly limited. Under the Federal Administrative Procedure Act, the DOL has to go through a number of challenging steps to significantly change a rule that is already final and in effect. Unless the Chamber of Commerce case (or another case) cuts back the DOL rule itself, harmonization may not result in the changes some parts of the retirement industry have been hoping for.

FN: If having two competing federal fiduciary regulations might make things complex, image every state having its own separate fiduciary rule. That appears to be where we’re headed with several states. Tell us where you see things as they stand today with regard to state sponsored fiduciary initiatives. How does this harm or help the broader effort to create a uniform fiduciary rule?
Levine: The state fiduciary initiatives (whether Connecticut, New York, New Jersey, Nevada, California, or any other state) are very similar to the state “Secure Choice” IRAs that have been developing across the country.  s of now, put simply, many of the state-level initiatives are more likely to impact advice on IRAs than ERISA plans because there are strong arguments that state level fiduciary rules are preempted for ERISA plans.

However, as the number of fiduciary standards multiplies across the states, especially in the IRA marketplace, it becomes more unlikely that there will be a truly unified standard. Also, as recently filed legislation in Massachusetts highlights, even a single “rule” creates multiple avenues for potential enforcement.

FN: Changing to other topics, we see growing discussion concerning the prospects of Congress finally taking action to approve open 401k MEPs. How might this help reduce fiduciary liability for companies that wish to offer 401k plans to their employees? What added fiduciary risk do you see arising from this idea (both for the company and for the service providers)?
Levine: For the past several years, I have repeatedly said “this is it, the year of the MEP.” Yet other political realities have intervened and MEPs have just remained a bipartisan Democratic and Republican agreement without actual legislation. So, I’ve stopped saying “this is the year.”

If Congress does move forward, open MEPs hold the potential to minimize the day-to-day administration responsibility for MEPs and to expand the use of 3(38) outsourcing as advisers to MEPs, rather than committees. So, definitely, there are potential reductions in risk. However, there are potential downsides. I expect that if open MEPs go forward, we will see a large market of MEPs – from individual adviser, from recordkeepers, from others service providers, etc… In fact, I have spoken and am working with many service providers focusing on this future world. Not all open MEPs will be created equal. Plan sponsors will still need to prudently select and monitor an open MEP solution and the potentially larger size of open MEPs holds the potential to make these plans lawsuit targets.

FN: Finally, recently, Fidelity declared it would begin charging an asset-based “administrative” fee to plans investing in Vanguard funds. What kind of fiduciary liability questions does this raise concerning Fidelity? The non-Vanguard funds that may be paying Fidelity a “shelf fee” (i.e., how does this represent a conflict-of-interest)? And the plan sponsor, who may now be required to pay out-of-pocket fees for some employees while other employees investments pay the same fees through revenue sharing?
Levine: Fidelity’s new administrative fee is akin to a lot for the platform access fees that are charged in other areas of the industry – such as managed account access fees that have been successfully defended in recent litigation. In the end, like any fee, the key for evaluating how to proceed is their process that looks at cost, value, and the services offered. There is no one right or wrong way to run a plan, so we’ll have to watch how this topic evolves.

FN: Do you have any other thoughts or ideas you feel our readers might benefit from?
Levine: My closing thought for plan sponsors and service providers is that while there are compliance and litigation challenges for plan sponsors and service providers, the sky is not falling. Yes, there are bumps in the road but as the old adage says, an ounce of prevention is worth a pound of cure.

I appreciate your taking the time to speak with me.

FN: We appreciate your taking the time to share your many pertinent thoughts with our readers. As you say, the world of fiduciary is ever evolving, with some things seeming to change on a day-to-day basis. It’s extremely enlightening, then, for someone of your caliber to offer perspective on what, for many, appears too faced-paced to keep up with. Thanks again and we look forward to hearing more from you in the future.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA

1 Comment

Only registered users can comment. Login is sponsored by…

Order Your 401k Fiduciary Solutions book today!

Vote in our Poll


The materials at this web site are maintained for the sole purpose of providing general information about fiduciary law, tax accounting and investments and do not under any circumstances constitute legal, accounting or investment advice. You should not act or refrain from acting based on these materials without first obtaining the advice of an appropriate professional. Please carefully read the terms and conditions for using this site. This website contains links to third-party websites. We are not responsible for, and make no representations or endorsements with respect to, third-party websites, or with respect to any information, products or services that may be provided by or through such websites.