'Intensive' lobbying behind DOL turnabout on DC plan brokerage window

The Labor Department's July 30 retreat from greater monitoring and fiduciary responsibilities by defined contribution plan sponsors for self-directed brokerage accounts was the product of much lobbying, discussion and debate.

The switch was due to “an intensive effort” of lobbying by industry members to contacts in the Office of Management and Budget, the White House and Congress, said Edward Ferrigno, the Washington-based vice president for legislative affairs for the Plan Sponsor Council of America. He didn't identify any contacts.

No single event or person was cited by those interviewed as being the catalyst for change.

Bradford Campbell, Washington-based counsel for law firm Drinker Biddle & Reath LLP, said the lobbying effort was notable because “employers and providers had the same sense of concerns,” especially the belief that the DOL was trying to create a regulation without a formal review.

“Process is important because it flushes out problems,” said Mr. Campbell, who was assistant secretary of labor for the Employee Benefits Security Administration from 2006 to 2009.

“My sense of watching this” is that when industry members didn't get a satisfactory response from the department, “everyone went to the White House and OMB, saying that this agency was not playing by the rules that you had defined,” Mr. Campbell said. “'We want you to tell them to back off' - and they did.”

The major irritant in the May 7 document on fee disclosure was a passage on self-directed brokerage accounts or windows. Industry participants interpreted this to mean sponsors and providers would have to keep track of all investments within brokerage accounts, checking if any investments crossed certain thresholds based on participants' use.

If such a threshold were crossed, a specific brokerage account investment would be considered a designated investment alternative and thus subject to additional monitoring and fiduciary responsibility for sponsors. Providers said this would require significant additional expense to create systems to monitor the investments.

The turnaround — from the department's May 7 guidance document — was pretty quick by regulatory standards, according to industry experts.

They were pleased with the revision because it removed wording they claim was an expensive, administratively complex and last-minute effort to create a new regulation without following formal regulatory procedures.

“We weren't trying to cause a big fight” by talking to legislators and congressional staff members, said Lynn Dudley, senior vice president for policy at the American Benefits Council, Washington.

But at the same time, she said, “we weren't confident that we were making the progress that we needed to make.”

One lawmaker who got involved was Sen. John Kerry, D-Mass., who sent a letter to Labor Secretary Hilda Solis six days before the DOL issued its revised guidance document.

Mr. Kerry's letter echoed the industry's complaints. The May 7 guidance document “sets forth new rules that were not previously contained in any guidance issued by the Department,” the letter said.

Mr. Kerry asked that the guidance be withdrawn. He said the DOL should follow “all applicable statutory and administrative requirements” contained in existing law, presidential executive orders and OMB guidelines “that govern the agency rule-making process.”

Phyllis Borzi, assistant secretary of labor and head of the EBSA, was the key DOL official involved in the brokerage window flap. Ms. Borzi declined to comment, a DOL spokesman said. The spokesman referred to an e-mail message sent by the DOL on Monday explaining its decision.

The e-mail, sent to “stakeholders and EBSA website update subscribers,” said the DOL issued its revised guidance “to further clarify its position and to give interested parties more time to engage in discussions with the department on practical and cost-effective ways to ensure participants and beneficiaries receive all the fiduciary protections afforded to them under ERISA when they use brokerage windows and other similar arrangements.”

Both the e-mail and revised guidance document said the DOL might consider additional regulations on brokerage accounts in the future.

The turnabout was a surprise because early efforts by DC plan industry leaders were rebuffed by Ms. Borzi and other DOL officials during a late May meeting. In a session that was described by some participants as tense and disappointing, they portrayed Ms. Borzi as unyielding in her assertion that the May 7 guidance document was a clarification of existing law.

Ms. Borzi reaffirmed her stance in a June 18 speech at the SPARK Institute's annual meeting in Washington. ”It is hard for me to imagine that people could say with a straight face, "This is new, we never knew,'” she said. “It is entirely possible that people in the industry haven't been capturing that information, but if you're offering these choices, you can't just set it and forget it.”

Ms. Borzi added that she was concerned about sponsors offering only brokerage windows in their DC plans in the hope of reducing or avoiding fiduciary duties required by plans that identify designated investment alternatives.

Trade groups continued to send detailed letters to the DOL. In early July, industry members pleaded their case with officials at the OMB, arguing the DOL guidance was really a new regulation and that the DOL wasn't following regulatory procedures.

After that, industry representatives tried to enlist congressional support by holding “a bunch of meetings” with staff members of several legislators, said one industry trade group executive who requested anonymity.

“I can't tell what ultimately persuaded them to change,” said Craig Hoffman, general counsel of the American Society of Pension Professionals & Actuaries, Arlington, Va. “They received a lot of feedback that made them realize there was a lot of opposition from people who were affected. I don't think they expected the concerted effort.”

“There's no way of knowing what tipped the department over,” said Larry Goldbrum, the Washington-based general counsel for the SPARK Institute. “There was such a loud unified voice coming from so many angles.”