Episode 85: What the DOL’s New Fiduciary Proposal Means for Plan Sponsors

Please note: This is an AI generated transcription – there may be slight grammatical errors, spelling errors and/or misinterpretation of words.

Revamping Retirement Episode 85

Intro: Covering the ever evolving retirement plan landscape to help identify the biggest opportunities for plan sponsors, CAPTRUST presents Revamping Retirement.
Peter Ruffel: Hey everyone, and welcome back to another episode of Revamping Retirement. I’m Pete Ruffle and I’m joined by my co-host, Jennifer Doss. Jennifer, welcome back from some well-deserved vacation. I’m guessing that on your flight home you had the Deal Wells website up just hoping to find something to keep your attention for a few hours.
Did you end up getting lucky?
Jennifer Doss: I did, I was the envy of the plane. everybody on spring Break was so excited for what I had to talk about. it was great.
Peter Ruffel: Well, the basis of our conversation today is about the DOLs proposed rule that just dropped at the end of March. that’s titled Fiduciary Duties and Selecting Designated Investment Alternatives.
And Who better to have a discussion with about that than Kelsey Mayo? Kelsey is the Chief of retirement policy and regulatory affairs for the American Retirement Association. Kelsey, great to have you, and thanks for joining us. Do you mind doing a quick overview of what you do and who the a RA is?
Kelsey Mayo: Thanks for having me. On the American Retirement Association or the A RA is a nonprofit professional organization with two major goals. The first is to educate all retirement plan professionals and benefit professionals, and the second is to create a framework of policy that gives every working American the ability to have a comfortable retirement.
In my role, I get the distinct pleasure of. Working towards both missions. I do a lot of speaking on webcasts and conferences and a lot of education of retirement professionals. And then I also get to do a lot of advocacy both with members of Congress as well as our relevant regulatory agencies, including the Department of Labor, particularly relevant for this conversation.
Peter Ruffel: Absolutely. And as you’re prepping for all of that, that your daily tasks require of you, and a week’s worth of hindsight, what’s your initial reaction so far to this proposed rule? any immediate surprises?
Kelsey Mayo: Yeah. I immediately opened it up. It was 165 pages, so it went straight to the meat of it.
I skipped down to the rule first to see, What is the rule that is being proposed? And my first reaction was, this is a lot of clarity and not a lot of direction, and I really mean that in the best way. There was no big policy swing that I saw. The department isn’t nudging fiduciaries toward any product.
Nor are they nudging fiduciaries away from any product. it was really just trying to bring some order to what has become, in my opinion, a pretty messy litigation driven landscape. And so if there was a surprise,it was really how deliberate the Department of Labor was about focusing on
The fiduciary process and not the individual products. I think that many folks expected the rule to focus on alternative asset classes, and so the fact that this rule came out and is applying equally to all asset classes really may have been a pretty big surprise for some.
Jennifer Doss: Yeah,
Just because the executive order that spurred this from the DOL was specifically about alternatives. And so everybody thought, this rule is gonna be specifically about how to use alternatives within asset allocation funds. And yes, this was a much broader,I would argue more useful, proposal.
Let’s talk about the alternatives piece though, because there is alternatives in the name, but it’s designated investment alternatives I don’t wanna get the two confused. explain the difference, what it’s covering what it’s not.
Kelsey Mayo: Yeah. this has really been.
Very confusing, particularly for those who are not in our industry, with the president’s executive order, using the term alternative investments. And of course, that’s what spurred this rule. It really didn’t help. but it is not an alternative assets rule. Like you said, it’s designated investment alternatives.
And here the word order matters ’cause a designated investment alternative. The DIA is just ERISA speak for. Any investment option that is on a planned menu, it has absolutely nothing to do with alternative assets. we’re talking about everything from your most vanilla single asset class mutual fund to target-date funds to index funds to stable value funds.
And yes, also alternative investments or alternative asset classes. currently those alternative assets like private equity and private credit, they’re typically not. Designated investment alternatives currently, and this rule isn’t somehow making it any easier for a fiduciary to offer them as one.
If a fiduciary wanted to add, the Alternative Asset class as a DIA, the rule would apply the same rigorous fiduciary process requirements to the consideration of that alternative asset as it would every other fund. So it really and truly is not about alternative assets at all.
Jennifer Doss: maybe we should call it the DIA role or the selection rule, or we should come up with another snazzy name for it.
’cause it really is a little confusing for people. And to your point, the rule doesn’t even talk about, putting alternatives as designated investment alternatives in the plan. It’s talking about using them as components within, another designated alternative, like a target day fund or something like that.
So we did talk about how the executive order Spurred this rulemaking process, but the reason that they broadened it out, let’s talk about the reason that the DOL decided to make it a little bit more expansive. what issue or gap were they trying to address?
why did they expand it?
Kelsey Mayo: it’s certainly a rule for planned fiduciaries. I think it also reads a bit like a message to the courts who are also considering fiduciary cases. Maybe that tells you where they think some of the problems are. In many ways, I think this rule exists because despite decades of living with erisa, fiduciaries are still operating in a world where plaintiffs litigate with the benefit of hindsight, and courts aren’t always consistent about what the standard is.
And it’s particularly problematic when it comes to industry innovation, especially in investment design. And any kind of innovation seems to be creating gray areas in how the fiduciaries are gonna be judged because they’re being judged with the benefit of hindsight that are employed by some of these plaintiff’s attorneys and sometimes courts.
And so I see this as the Department of Labor stepping in to say, look, We need to refocus this conversation. The standard is process over outcomes. I think the department’s trying to create a more predictable and clear framework that everyone can operate within that still carries out all of Risa’s protective mandates to make sure folks are operating with the clear, goal of benefiting participants beneficiaries.
Peter Ruffel: let’s jump on that process piece of it. reading into what the rule includes itself, it lays out a series of relative investment factors a prudent fiduciary should consider when selecting an investment. When I read through them, They included performance fees.
Liquidity valuation, benchmarking, complexity. It was a non-exhaustive list. So it almost alludes to, hey, you should consider anything that’s relevant. but none of those seemed novel. Was that intentional or was that just by happenstance?
Kelsey Mayo: I think it was very intentional. Obviously we’re just sort of reading the tea leaves, but I think it was very intentional and honestly pretty strategic.
the Department of Labor. Isn’t trying to reinvent fiduciary duty. This is a longstanding principle. what they’re doing instead is taking what fiduciaries, to your point, what they’ve been doing for decades. In my mind, it’s almost like their greatest hits, and we’re putting them into a single coherent framework here.
the substance of what fiduciaries are expected to do under the rule isn’t changing, and the Department of Labor’s not trying to change it. What they are changing, is some clarity in how the Department of Labor believes that process should be judged. That fiduciary decision making is inherently about balancing all trade-offs on the front end, not in hindsight, and not based on one metric in isolation.
And so seems to be what the Department of Labor is doing. I think very intentionally emphasizing process with this proposed rule.
Jennifer Doss: So in terms of intentionality, pick at that for a second. I was actually surprised that there were so many examples. In the rule. I don’t know if I’ve ever read one that has so many examples now.
Helpful in lots of different cases, but I’m curious if that was something that you were also surprised by, or if there’s a reason, there’s so many included and what the thought process there was.
Kelsey Mayo: Yeah, I probably should have listed the number of examples as the thing that I found most surprising when I skipped to the end and read the rule.
I think the rule was over 30 pages long, and if you strip out all of those examples, I bet you it is only five or six pages. that is how example Rich this proposed rule is. so in many ways I think the examples are doing a lot of the heavy lifting here. And again, I think that was pretty strategic because let’s be honest,
Fiduciaries don’t struggle with the concept of prudence and the Department of Labor isn’t trying to change that standard. But what we see fiduciary struggling with is. Okay, I get it. But how do I apply it in real world situations where nothing is perfectly aligned, nothing is black and white.
And I have multiple factors and I’ve been in those committee meetings myself, Where fiduciaries were asking me back when I was in private practice still, how do I measure reasonableness? do I have to pick the fund or the provider that has the lowest fees regardless of any other consideration?
how do I carry about this prudent process? And while they’ve navigated it, very well for decades, they still appreciate additional direction and clarity. And the examples are really getting at that, right? They’re illustrating how the prudence rule applies, how to weigh those competing factors, how to select comparators and potential pitfalls that a fiduciary might encounter.
And many of the examples come from real world situations. You can actually see the echoes of litigation in some of these examples. And so they’re adding a lot of context for fiduciaries and for courts to use in developing and analyzing the fiduciary process. So yeah,I do think that the examples are an important part of the proposal.
and they give. Plan fiduciaries that meaningful context that they’ve really been asking for without me changing the underlying and longstanding rule.
Peter Ruffel: I wanna unpack a little bit about the safe harbor aspect to this proposed rule. if a fiduciary follows this process, considers these relevant factors, engages in an objective, thorough analytical process, can document such, then it says they’re entitled to significant deference.
what does that legalese mean? how does that might apply in, say, litigation?
Kelsey Mayo: you’ve really hit the nail on the head. This is really where it gets interesting. This is not your classic ERISA or tax code safe harbor, Where you check the boxes and you’re done. Period.
Significant deference is the key phrase there, and I think it’s the Department of Labor trying to signal to fiduciaries that the department itself will, give the fiduciary the benefit of the doubt when they follow. This process, but also potentially trying to signal to courts that if fiduciaries did all this work on the front end, then you shouldn’t be second guessing them with the benefit of hindsight.
But it’s absolutely not a safe harbor. Free pass I’ve seen some outlets say that it shields fiduciaries from litigation, and I just don’t agree with that. But it does start to potentially rebalance the playing field in a way that a lot of fiduciaries have been hoping for.
Jennifer Doss: Kelsey, I’m interested in your opinion.
You were just hitting on it in a post. Chevron world, where the court said, look, we can give deference to the DOL or we don’t have to. do you think this proposal, has a meaningful impact on litigation orthatremains to be seen,

Kelsey Mayo: I think that’s right. certainly the courts are not bound to defer to the Department of Labor. They can find this persuasive, and I don’t think this is going to suddenly make ERISA litigation disappear, but I do think it could start changing the conversation. right now a lot of cases hinge on you picked the wrong fund.
And many make that assertion by comparing the fund in question to benchmarks that aren’t similar or they choose to compare it only over a very select period of time where the fund was potentially underperforming, whatever, thing they chose. And I think this rule is trying to push things away from did you pick the wrong fund?
Toward what is the ERISA standard of, did you follow a prudent process? And it clarifies what alternatives you should be comparing things to, and what timeframes that process should consider. overall under the DOL standard of fiduciaries are documenting their decisions well and following the framework.
Maybe this will make it a little bit harder for plaintiff’s attorneys to make the case. Courts follow suit and are really focusing on the process and on what those comparators are and what those benchmarks are. But litigation is not gonna go away, and frankly it shouldn’t. If a fiduciary does not use a good process, they still can and frankly should be held accountable.
But for those fiduciaries, we’re following a really strong fiduciary process. This might reduce what the DOL, I believe called opportunistic litigation, and that would be a win. That would be a win for prudent fiduciaries.
Peter Ruffel: I think if you were doing a keyword search, on the transcript of this proposed proposal will come up a lot.
I just wanna remind the audience that. We’re now entering in a 60 day comment period, and then a final rule will be released, which is always an interesting opportunity just to see how the government receives stakeholder opinions on one side or the other on different matters. And then how they opine and change where they started with to where they end.
So looking forward to see where we all go with that. the question that I’m getting to Kelsey is with your crystal ball, what. Do you think might change? One thing in my mind, which the DOL opined on inthe proposed rule and the preamble was the notion of that we’re only touching the selection prudence element and not the monitoring element.
Do you think that’s gonna find its way into a final rule? Are there any other things that are on your mind?
Kelsey Mayo: knowing what happens with the final rule is always really hard to guess. if I had to read the tea leaves a bit, I would say I think they will. Reserve monitoring for a future rule, although perhaps there will be more allusion to it in the final rule.
I do think we might see them put this rule in a little bit more context. The rule did not replace or eliminate any of the existing prudence rules, so those all remain on the books. This is a yes and situation. perhaps we could see it more clearly. Placed into the full framework. And of course, I think possibly some tweaks or additions to all of those examples.
I think we’re gonna see the commenters really stress testing those examples. And so naturally the department might take that feedback to tweak how it was said or clarify some of the examples, but. overall I think the proposal feels pretty measured remaining asset class neutral. And so it’s not trying to break new ground, just trying to stabilize it.
I really would be surprised by a total change of direction. But we’ll see. I’ve been wrong before.
Jennifer Doss: there’s gonna be lots more to unpack, about this role, Kelsey, in the coming weeks, as you said, people will be commenting.
I always find that really, interesting to see how different trade groups respond and different parties that have different priorities respond. And, we’ll be particularly interested in how some of the alternative asset managers respond and their feedback. so this will be an evolving piece and
and we’ll see what the final rule comes out to be. So we really appreciate you digging deep and giving us a very quick overview of what we’re looking at today. So we wanna get personal for just a second. you’re actually on vacation right now, so maybe this is forefront in your mind.
what does retirement look like to you? Kelsey Mayo.
Kelsey Mayo: I strongly believe in retiring to something not from something, and I don’t know what that two is gonna be when my time actually comes. I’m still quite a few years away from that. But if I was retiring today, I would likely devote a lot of. Time to travel in all likelihood, but also, to helping train dogs in search of their forever homes.
I got very into dog training, after I rescued a pup a few years ago. it’s been a transformative experience, both for me and for her, but it does take a lot of time to do it well, and time is something that I would have an awful lot more of in retirement. So that’s what I would envision if I was retiring today.
Jennifer Doss: That’s awesome. Yeah, I don’t think we’ve had that answer before. So that one, that’s a good one. That’s a really good one. And you’re right, it does take a lot of time to train a dog. I did that for one of my pups a long time ago, and it takes dedication Well thank you Kelsey.
Thanks for joining us. Pete, thank you for being a great co-host. thank you to our audience for listening and if you like what you heard, please like and subscribe wherever you get your podcast and we will talk to you guys next time. Thanks.
The discussions and opinions expressed in this podcast are those of the speaker and are subject to change without notice. This podcast is intended to be informational only. Nothing in this podcast constitutes a solicitation, investment advice, or recommendation to invest in any securities. CAPTRUST Financial Advisors is an investment advisor registered under the Investment Advisors Act of 1940.
Nancy: This presentation does not contain legal, investment, or tax advice.Views expressed are those of the speakers and interviewees and not necessarily the views of CAPTRUST. Opinions are subject to change without notice.

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