Speaking July 27 at the 2021 NAPA D.C. Fly-In Forum, the Acting Assistant Secretary for the DOL’s Employee Benefits Security Administration outlined the key areas the department is working on, including both cryptocurrency and cybersecurity issues.
While noting that he didn’t have much to share because the department is in the early stages of conversations, Acting Assistant Secretary Ali Khawar did suggest that reports about the use of cryptocurrency in 401(k) plan lineups is troubling and that he anticipates future guidance.
“When you look at cryptocurrency and the different forms of currency—there is a lot of volatility, there’s a lot of noise, there’s very little transparency, and I’m sure some of you have seen reports about cryptocurrency becoming an option in investment lineups, but it’s something that we find very troubling,” Khawar told the NAPA delegates.
Khawar said he anticipates that the DOL will issue some guidance in the near future, but didn’t give any other details, other than to say keep your eyes open. “I do think we will feel a need, ultimately, to say something on this, because it is a pretty troubling development for these investments to be held in tax-advantaged retirement accounts,” he added.
Khawar also spoke about the department’s recent “best practices” guidance in relation to cybersecurity that was divided between participants, plan sponsors and service providers. Noting that these are critically important issues, Khawar explained that the guidance directed at plan sponsors was intended to help them think through the issues they need to pay attention to when selecting and monitoring a service provider with respect to cybersecurity.
The guidance directed at service providers is also critically important, because, as he noted, there are a lot of assets under management in the retirement system, which is something to be proud of, but also something to be concerned about because of the inviting target for bad actors.
“When you think about the experience of COVID and how that has changed access to accounts and a lot of other things for participants, some of these cybersecurity issues are a bit more acute than they may have been even a few years ago,” Khawar observed. He added that it’s not a good combination with the bad actors in the space becoming increasingly sophisticated and increasing amount of people accessing their information electronically. “It’s something we’re viewing as a high priority for our enforcement program, as well as for guidance,” he noted.
Turning to Prohibited Transaction Exemption 2020-02 issued during the Trump administration, Khawar explained that after meeting with numerous stakeholders at the beginning of the Biden administration, the conclusion was reached that they would allow PTE 2020-02 to go into effect, with a “runway” through mid-December to serve as safe harbor enforcement relief.
Khawar noted that the FAQs the department issued were to help firms understand the requirements of PTE 2020-02 and get them to a place where they’re ready to go on day one if they choose to take advantage of the exemption. The DOL official also noted that work continues on this issue. With respect to implementation runway, Khawar noted that DOL continues to engage with stakeholders to learn what challenges people are facing and that they may put out guidance before December to make sure that implementation meets the letter and spirit of the exemption.
The DOL is also paying close attention to where they think there may be opportunities for abuse. One example, Khawar noted, is that they’ve heard some people may be setting up structures in which they tell their clients they’re not going to provide advice to a participant with respect to a rollover from a workplace savings arrangement to an IRA, but they apparently suggest that, once the funds are rolled over, they will be happy to give advice on how it should be allocated and what to invest in.
“That clearly is not what PTE 2020-02 has in mind. It is not the way that these transactions should be conducted, and I think that’s an example of an area where you should expect that when we hear things like that, we are paying attention,” Khawar warned.
The other active work stream on the fiduciary rule is looking at whether to address the 1975 five-part test and other preexisting exemptions that were not amended by the Trump administration when it implemented PTE 2020-02. As to whether firms are wasting their time in coming into compliance with PTE 2020-02, he explained that the department is not taking anything off the table, but believes that firms that are making an effort to come into compliance will have a competitive edge.
Pooled Employer Plans
Turning to PEPs, Khawar said he believes they hold a lot of promise and potential, but there are some areas where they have concerns. “If you think about the structure of the pooled employer plan, that central entity not being the employer, and the extent to which the employer really is exercising oversight over that central entity and making sure that issues around self-dealing, for example, are taken care of—those are some of the things that we are thinking about,” he explained.
He also noted that the department is working very actively on the Form 5500, where Congress directed the department to work on a simplified reporting structure for PEPs. Khawar said he’s hopeful that a proposal will be released fairly soon.
Environmental, Social and Governance Factors
Regarding DOL’s work on ESG factors, Khawar noted that following the March non-enforcement policy the department issued regarding the Trump administration’s final rules on financial factors in selecting plan investments and proxy voting, they are continuing their work in this area with a goal of issuing rules in September covering both proxy voting and ESG issues.
Khawar explained that one of the consistent themes they heard in conducting stakeholder outreach was that the financial factor rule was having a “chilling effect” on plan fiduciaries, even in situations where they thought it was in the best interest of the participants to make a decision that took ESG factors into account.
And while noting that September is an aggressive timeline, Khawar stated that’s “because we think this is a very important issue and it is quite important for us to move forward on this as soon as possible, so you should expect to see something hopefully within a few months.”