2016 Regulatory Update

Bonnie Treichel, J.D.
Senior Consultant & Chief Compliance Officer 


For practitioners, unquestionably, the most notable change during the past year has been the Department of Labor’s (the “Labor Department” or “DOL”) Conflicts of Interest Rule. For plan sponsors, however, the past year brought along continued fee transparency and fee compression, which began after 408(b)(2) and 404(a)(5) and which continues as a result of the DOL’s Conflicts of Interest Rule; increased responsibility for plan sponsors to understand, articulate and document the value and services that covered service providers continue to bring to the plan; and increased litigation, which we now see moving down-market toward smaller plans. The Internal Revenue Service (“IRS”) and DOL continue to have hefty agendas as we finish out 2016 and move into 2017 – seeking to close the gap on the retirement readiness crisis and make retirement savings vehicles universally available; increasing administrative efficiencies by substantially revising the determination letter program, for example; and cracking down on offenders of the rules. For example, the Labor Department is increasing civil monetary penalties to retirement plans that are not in compliance with the administrative rules.1

While not exhaustive, this 2016 Regulatory Update provides an overview of many initiatives from the DOL and IRS during the past year. For additional information, or to discuss the way in which these changes impact your plan, contact your Multnomah Group Consultant.


DOL Conflicts of Interest Rule

Following its announcement on April 6, the DOL published its Conflicts of Interest Rule and regulatory package (the “Final Rule”) on April 8, 2016. This highly-anticipated and controversial regulatory package sought to bring a 40-year-old regulatory scheme up-to-date by requiring “all who provide retirement investment advice to plans and IRAs to abide by a “fiduciary” standard – putting their clients’ best interest before their own profits.”2

The Final Rule – over 1,000 pages – impacts many areas of the financial industry’s regulatory landscape. However, for plan sponsors, the rules of the road do not substantially change. Likewise, for advisors such as Multnomah Group whose focus has traditionally been on retirement (rather than retail) and who have always charged a flat fee for service (rather than commissions), the impacts are minimal.

The Final Rule seeks to:

Revise to the definition of “fiduciary” under the Employee Retirement Income Security Act (“ERISA”) Section 3(21)(A)(ii);

Revise the activities that are excluded from the definition of advice under the Final Rule, (including education); and

Create the Best Interest Contract Exemption (“BICE”), which is a mechanism to allow certain types of compensation that would otherwise be a prohibited transaction under the new definition of fiduciary in the Final Rule.  BICE creates an agreement between the financial institution and the investor in which the financial institution agrees that it will serve as a fiduciary and will adhere to the “best interest” standard of care, among several other requirements.

For plan sponsors, key considerations under the Final Rule include:

  • New agreements and disclosures: Be prepared for participants and the plan to receive novel disclosures and agreements, particularly participants engaging in rollover transactions from the plan to an individual retirement account (“IRA”).  These new disclosure documents will chiefly be a result of BICE.
  • Changes in education: Given the broader definition of advice, activities that were previously considered education will now likely fall under the auspice of advice, which will either result in (1) a pull-back from the education provided or (2) increased disclosures/agreements around the provision of the advice.  For example, vendors/recordkeepers that provide on-site education to plan participants are likely evaluating their current practices and formulating compliant solutions; be sure to ask your vendors/recordkeepers what you can expect after April 2017. 
  • Increased responsibility on behalf of the plan sponsor in monitoring education materials: While the safe harbor provisions of the DOL’s Interpretive Bulletin (“IB”) 96-1were substantially preserved, leaving the opportunity for education with respect to (1) plan information, (2) investment information, (3) asset allocation models, and (4) interactive investment materials, the Final Rule did include a provision requiring the plan sponsor to monitor the impartiality of the education materials.  Specifically, plan sponsors – as a part of their responsibility to prudently select and monitor service providers – have an obligation to evaluate and monitor asset allocation models and interactive materials being made available to participants as a part of the education.4

The Final Rule’s applicability date is April 10, 2017, and the final BICE requirements commence on January 1, 2018.

Socially Responsible Investing

Some investment firms have started to incorporate non-financial criteria into their investment process.   Broadly characterized as "socially responsible investing," these investment management firms have developed investment processes that factor in environmental, social, and governance (“ESG”) objectives alongside traditional investment methodologies. Historically, the ESG criteria might have focused on excluding investments in companies in the gaming, alcohol, tobacco, defense, or weapons industries. More recently, a greater interest in environmental and sustainability issues has generated new funds designed to meet those objectives. Another common set of ESG criteria are those that align with the practices and teachings of certain religious denominations. 

In 2008, the DOL issued guidance that established (arguably) a more stringent view on the use of socially responsible investments. However, at the end of 2015, the DOL issued IB 2015-01, which gives plan sponsors the opportunity to use ESG factors as a “tie-breaker” so long as the investment is appropriate for the plan and economically and financially equivalent.  This was the Department’s longstanding view.  In addition, though, the Department also acknowledged that in some instances, “ESG factors may have a direct relationship to the economic and financial value of the plan's investment,” and in such cases, the ESG factors can be more than a tie-breaker and can be part of the primary analysis in selecting the investments. For plan sponsors, be cognizant of this guidance if ESG factors are important to your constituency.     

Selection and Monitoring of Service Providers (including your Auditor)

Are you a plan with more than 100 employees?  If so, how did you select your auditor this year?  Probably not a question you thought about recently, but just like the other service providers to your plan, the auditor – if paid from plan assets – is a covered service provider that must be prudently selected and monitored, and the DOL is cracking down.  Last year, the Department released its study regarding the quality of audits,7 finding that there is a link between the number of employee benefit plan audits that a Certified Public Accountant (“CPA”) performs and the quality of the audit work.  Specifically, when the CPA firm only performed one or two audits per year, the firm had a 75% deficiency rate in their work.  On the same track, a firm that performed fewer than 25 plan audits per year still had deficiencies in 67% of their work. 

What does this mean for your plan?  Find an auditor that focuses on retirement plan audits.  Just like other covered service providers, ask questions before hiring your auditor, which include, but are not limited to:

Questions to consider when hiring an auditor:

What are your background, experience and credentials?

How many retirement plan audits do you perform each year?

Can you provide references for clients similarly-situated to our plan?

Be sure to document your responses to these questions and others before hiring your auditor, and continue to monitor the quality of your auditor on an ongoing basis. 

Changes to Form 5500

Due the last day of the seventh month after the plan year ends – or in other words, July 31 for a calendar year plan8 – the Form 5500 recently underwent changes.  Known as the “IRS Compliance Questions,” new lines 4o, 4p, 6c, and 6d were added to Schedules H and I and new part VII was added to Schedule R of the Form 5500.  However, for 2015 filings, the IRS announced that these lines do not need to be completed by plan sponsors.  The decision to hold off is due to concerns and pushback regarding privacy and misreporting concerns.  For plan sponsors, stay tuned for next year’s reporting requirements with respect to these additional questions.

Changes to Determination Letters

Is your plan an individually designed retirement plan?  If so, take note: the IRS determination letter program is changing.  First, the staggered five-year determination letter program will be eliminated and instead, the IRS will only issue determination letters upon initial plan qualification and for qualification upon plan termination.9 Second, the expiration date on previously-issued letters (prior to January 4, 2016) are no longer operative.10 Third, the deadline for pre-approved defined contribution (“DC”) plans (adopted on or after January 1, 2016) to apply for a determination letter has been extended from April 30, 2016 to April 30, 2017; this extension allows time for DC plan sponsors to move from an individually designed plan to a current pre-approved plan.  For plan sponsors, stay tuned, as the IRS has promised additional guidance with respect to the determination letter program, which may, or may not, make it more desirable for plan sponsors to continue with an individually designed plan (as opposed to a pre-approved plan).  

Mid-year Changes to Safe Harbor Plans and Safe Harbor Notices

Effective January 29, 2016, the IRS changed their course and announced that a safe harbor 401(k) plan11 may be amended mid-year unless the proposed change is on a list of prohibited mid-year amendments, noting that the list of prohibited changes is now very short.12  For plan sponsors, you may consider taking advantage of this new guidance, but keep in mind that for some changes, additional provisions may be required with respect to notice to participants/beneficiaries and their respective election opportunity prior to a change.  


While the DOL spent most of the year fending off critics of the Conflicts of Interest Rule, the DOL through its Employee Benefits Security Administration (“EBSA”) division, still has a long-list of regulatory items that have not been forgotten.  Items that you may see pop-up again soon (in the next six to twelve months and beyond) include:

  • Savings arrangements established by states for non-governmental employees. Several states, including Oregon, Illinois and California have sought to address the retirement readiness crisis by taking matters into their own hands.  These states have sought to pass legislation (some successfully) that addresses the retirement security issue in one of three ways: (1) creating a state auto IRA13; (2) creating a state-run plan; or (2) establishment of an online marketplace.14  One of the major concerns with respect to the state plans has been the concern that federal law (i.e. ERISA) would pre-empt the state law.  In response, the DOL issued a proposed regulation as well as IB 2015-02, both of which seek to make these state-based plans viable options in light of federal rules.  
          This same guidance – IB 2015-02 – also address Multiple Employer Plans (“MEPs”), which make it easier for employers to come together, pool their               resources, and offer a retirement plan when they otherwise may not have been able to do so (e.g. small businesses).  Historically, MEPs have been               met with some discomfort by the DOL and as such, the availability of MEPs has been limited.15  Given the retirement savings crisis in America,                     however, the DOL provided guidance related to open MEPs in the context of state-sponsored plans (and as a part of IB 2015-02), providing a relaxed               standard for employers participating in the MEP to have “commonality” among one another.  Further legislation is expected with respect to open MEPs.

  • Pension benefit statements. Consistent with the theme of bridging the retirement savings gap, the DOL proposed rules in May 2013 which would require plans to include lifetime income projections on participants’ quarterly benefit statements.  In response, the DOL received many comments, but has yet to publish the final rule, as an area of contention was related to the way the presentation of benefits would be calculated and represented on the statements.16
  • Adoption of amended and restated voluntary fiduciary correction program (“VFCP”). Originally created in 2002, this program is designed to allow for voluntary correction of fiduciary violations.  A restatement of the VFCP in its entirety will likely be forthcoming, which will accomplish two primary goals: (1) streamlining the correction procedures and (2) expanding the scope of transactions eligible for correction under the program.
  • Guidance for service provider disclosures to plan sponsors. Released in March 2014, the DOL proposed a new rule that would require covered service providers to furnish a supplemental guide or similar tool along with their ERISA Section 408(b)(2) disclosures.  The purpose of the rule was to make 408(b)(2) disclosures easier for plan sponsors to read and understand.  After collection of comments during a 3-month comment period in 2014, the DOL has yet to take further action on this initiative.
  • Standards for brokerage windows. Many plans utilize the “do it myself” option of self-directed brokerage windows.  The DOL seeks to explore whether guidance is necessary with respect to the fiduciary requirements and regulatory safeguards around these arrangements.  A request for information was issued in late 2014, but the DOL has not yet taken further action.17

Similar to the DOL, the IRS continues to maintain a full agenda, as highlighted in its third quarter update to its 2015-2016 Priority Guidance Plan.18 While the IRS identified 277 projects that are priorities for the remaining portion of the year, 28 of these projects relate to retirement plans, including but not limited to guidance regarding: (1) the Employee Plans Compliance Resolution System (“EPCRS”); (2) lifetime income and (3) substantiation of hardship distributions, among many other priorities and projects.  


As you edge toward the end of the year, keep in mind a few other areas that may impact your retirement plan(s) and consider that some of these topics may be of interest to your board of directors/trustees and other executives at the firm such as the CFO or other key decision makers.

Litigation Trends

ERISA litigation continues year-over-year, but each year brings its own variety of suits.  This year, excessive fee claims continue, but have started their move down-market.  For example, we traditionally think of excessive fee lawsuits in the context of Intel, for example, who was recently sued over its use of custom target date funds within its retirement programs.19  However, in Damberg v. LaMettry’s Collision, filed in early 2016, a $9 Million plan with just over 100 employees, was also sued in an excessive fee case.  This case demonstrates that the protection traditionally felt by small plan sponsors – believing the litigation target is on the larger plans – may now be a false sense of security as ERISA attorneys across the country learn how to replicate these cases and strike against smaller plan sponsors.  Other areas where you might expect to see litigation in the coming months include litigation as a result of money market reform20, selection and monitoring of target date funds, and eventually, class action litigation as a result of the DOL’s Final Rule.  

Proposed Regulations for Deferred Compensation plans of State and Local Governments and Tax-Exempt Entities

In June 2016, the IRS proposed regulations under Section 457 and 409(A), which provide a long-list of much-anticipated clarifications and corrections to existing guidance (e.g., Roth contributions under eligible plans, “short-term” deferral rule clarification, and much more).  The guidance applies to nonqualified deferred compensation plans generally under 409A and to deferred compensation plans of tax-exempt entities under 457(f).  The IRS has requested comments, which are due back by September 20, with final regulations to follow. 


i See, Department of Labor Federal Civil Penalties Inflation Adjustment Act Catch-Up Adjustments, available at: https://www.federalregister.gov/articles/2016/07/01/2016-15378/department-of-labor-federal-civil-penalties-inflation-adjustment-act-catch-up-adjustments.

2 ER[1] Department of Labor, Chart Illustrating Changes from Department of Labor’s 2015 Conflict of Interest Proposal to Final, available at: https://www.dol.gov/ProtectYourSavings/comparison-chart.htm.

3 Department of Labor, IB 96-1; Participant Investment Education; Final Rule, available at: https://www.dol.gov/ebsa/regs/fedreg/final/96_14093.pdf.  Under IB 96-1, the DOL set out guidelines for determining education versus advice at the participant-level.  Specifically, the guidance provided four safe harbors that specifically were deemed to be “education” and not “advice.”  This guidance is being replaced by the Department’s Final Rule.   

4 The DOL specifies: “That evaluation should include an evaluation of whether the models and materials are in fact unbiased and not designed to influence investment decisions towards particular investments that result in higher fees or compensation being paid to parties that provide investments or investment-related services to the plan. In this context and subject to the conditions above, the Department believes such a presentation of a specific designated investment alternative in a hypothetical example would not rise to the level of a recommendation within the meaning of paragraph (b)(1).”  Definition of the Term “Fiduciary”; Conflict of Interest Rule – Retirement Investment Advice, available at: https://www.federalregister.gov/articles/2016/04/08/2016-07924/definition-of-the-term-fiduciary-conflict-of-interest-rule-retirement-investment-advice.

5 The Department originally provided guidance on socially responsible investing in 1994 in IB 94-1, which was replaced by IB 2008-01.  The 2008 guidance was intended to create clarity, but arguably it discouraged fiduciaries from considering and utilizing economically targeted investments and ESG factors.  See, Department of Labor Fact Sheet, Economically Targeted Investments (ETIs) and Investment Strategies that Consider Environmental, Social and Governance (ESG) Factors (October 2015), available at: https://www.dol.gov/ebsa/newsroom/fsetis.html.

6 The guidance clarifies: “When a fiduciary prudently concludes that such an investment is justified based solely on the economic merits of the investment, there is no need to evaluate collateral goals as tie-breakers.”  Department of Labor Fact Sheet, Economically Targeted Investments (ETIs) and Investment Strategies that Consider Environmental, Social and Governance (ESG) Factors (October 2015),available at: https://www.dol.gov/ebsa/newsroom/fsetis.html.  

7 See, Assessing the Quality of Employee Benefit Plan Audits (May 2015), available at: https://www.dol.gov/ebsa/pdf/2014AuditReport.pdf.

8 Note, however, that if a plan sponsor requests an extension for their corporate taxes, the Form 5500 deadline is moved to September 15. 

9 The IRS will also allow a plan sponsor to submit a determination letter “in certain other limited circumstances that will be determined by Treasury and the IRS.”  Internal Revenue Service Notice 2015-19,Revisions to the Employee Plans Determination Letter Program, available at: https://www.irs.gov/pub/irs-drop/a-15-19.pdf.

10 Internal Revenue Service Notice 2016-03, Revisions to the Employee Plans Determination Letter Program Regarding Cycle A Elections, Determination Letter Expiration Dates, and Extension of Deadlines for Certain Defined Contribution Pre-Approved Plans, available at: https://www.irs.gov/pub/irs-drop/n-16-03.pdf.

11 The IRS guidance also applies to 403(b) plans.  See, Internal Revenue Service Notice 2016-16, Mid-Year Changes to Safe Harbor Plans and Safe Harbor Notices, available at: https://www.irs.gov/irb/2016-07_IRB/ar08.html.

12 Prohibited mid-year changes now include: (1) increases in the number of completed years of service that are required for an employee to have a nonforfeitable right to the employee’s account balance attributable to safe harbor contributions under QACA; (2) reductions in the number, or otherwise narrow the group, of employees eligible to receive safe harbor contributions; (3) change to the type of safe harbor plan; and (4) modifications or additions to a formula used to determine matching contributions if the change increases the amount of matching contributions, or to permit discretionary matching contributions.

13 Oregon, for example, is in the process of creating a state-run auto IRA program, which is set to be implemented next summer (July 2017).  See, Oregon Retirement Savings Board, available at:https://www.oregon.gov/treasury/ORSP/pages/default.aspx.

14 Washington, for example, seeks to implement the marketplace model.

15 See, Department of Labor, Advisory Opinion 2012-04A, available at: https://www.dol.gov/ebsa/regs/aos/ao2012-04a.html.

16 See, Department of Labor Fact Sheet, Lifetime Income Illustration, available at: https://www.dol.gov/ebsa/newsroom/fsanprm.html.

17 See, Department of Labor News Release, Labor Department requests information on use of brokerage windows in 401(k) plans, available at: https://www.dol.gov/ebsa/newsroom/2014/14-1523-NAT.html.

18 See, IRS, 2015-2016 Priority Guidance Plan (April 29, 2016), available at:  https://www.irs.gov/pub/irs-utl/2015-2016_pgp_3rd_quarter_update.pdf

19 The lawsuit alleged that Intel breached its fiduciary duty by using high cost hedge fund and private equity products that have underperformed within its custom target date funds.  To learn more about this case and others, visit Multnomah Group’s blog post: http://blog.multnomahgroup.com/forward-thinking/intel-lawsuit.

20 To learn more about money market reform, review presentation(s) from Multnomah Group, available at:http://www.multnomahgroup.com/hubfs/PDF_Files/Webinar_Presentation_Slides/Money_Markets_Under_Seige.pdf?t=1466793087552.

Copyright 2016. Multnomah Group, Inc. All rights reserved.
Information herein is provided for general informational purposes and not intended to be completely comprehensive regarding the particular subject matter. Multnomah Group does not represent, guarantee, or provide any warranties (express or implied) regarding the completeness, accuracy, or currency of information or its suitability for any particular purpose. Receipt of information does not create an adviser-client relationship between Multnomah Group and you. Neither Multnomah Group nor our advisory affiliates provide tax or legal advice or opinions. You should consult with your own tax or legal adviser for advice about your specific situation.