Proposed DOL Regs explains the steps that managers of 401ks should take when considering investments

Broadcast Retirement Network’s Jeffrey Snyder discusses the new U.S. Department of Laborregulations for evaluating investments for your 401k (or 403b or 457b) plans with Kutak Rock’s John Schembari.

Jeffrey Snyder, Broadcast Retirement Network

John Schembari joins us this morning from Kutak Rock. John, great to see you. Thanks for joining us this morning.

John Schembari, Kutak Rock

Thanks for having me, Jeff.

Jeffrey Snyder, Broadcast Retirement Network

You know, John, it almost feels like deja vu. I don’t know why. I’m just getting that feeling of deja vu.

All right, John, I wanted to reach out to you because we have some new Department of Labor regulations around the investment selection process. Let’s talk about, I want to get reaction from you first, and then we can talk about what the regs say. So what’s your reaction to what you’ve read thus far?

John Schembari, Kutak Rock

It’s very positive. You know, the Department of Labor had a mandate to come out with proposed regulations that were going to make it safer for fiduciaries to offer alternative investments, private equity, private credit, Bitcoin, you name it. And what the department did is they actually came out with a roadmap for the selection of any investment and kind of a roadmap for fiduciaries in selecting any investment in a 401k plan.

They met their deadline. This is clearly fast-tracked. And so far, what I’m hearing from other practitioners and from clients is that this is going to be well-received.

Jeffrey Snyder, Broadcast Retirement Network

And John, what do the regulations actually say? And does it alter the selection process for investments in 401k, 403b, and or governmental 457b plans?

John Schembari, Kutak Rock

Yeah, well, it doesn’t change necessarily the process that sophisticated good committees have been following. But what it does do is it creates a safe harbor that if fiduciaries will do and consider six certain factors then the department tries to create a presumption of prudence. Meaning if they’ve considered these six things that the department thinks are important in evaluating any investment and they properly evaluate those six factors, then it will be presumed that that fiduciary was acting in accordance with ERISA.

Jeffrey Snyder, Broadcast Retirement Network

Okay, so as a reformed retirement plan advisor, I like that and I like a level playing field when it comes to the smaller plan sponsors and the larger plan sponsors. I would think that would be met with a lot of positivity. We’ll talk about the comment period in a second, but what’s the process, John, to review these proposed regs?

They don’t just become final. There’s a process and a timeline to become final.

John Schembari, Kutak Rock

That’s right. So these regulations are proposed and the department has given the public, you, me, anybody, 60 days in which we can submit comments. So that’s June 1.

After June 1, the department will go back to work. They’ll consider all these comments that everybody submitted and then they will issue a final regulation that will typically have a prospective effective date. That effective date could be as prospective as one month.

It could be one year long. The million dollar question is when will the final regulations come out? Sometimes with governments, it might take them 10 years to issue final regulations.

I don’t expect that to be the case here. One, we know that the current administration really wants to open up the trillion dollar retirement plan space to alternative investments. So there is a real push to get these regulations final sooner rather than later.

The other reason why I think these are gonna become final sooner rather than later is these regulations, while most regulations are written for the benefit of the employer or the fiduciary, these regulations were clearly written with a different audience in mind. These regulations were written by the current head of the Department of Labor who is a former CEO of a fiduciary liability insurance company. The entity that paid out millions and millions of dollars to plaintiff’s lawyers.

So when he wrote this regulation, it’s clear to me that he wrote this regulation to judges and to the plaintiff’s bar saying, hey, you’re on notice that if fiduciaries do these six things and they follow this process, you leave them alone. These are good fiduciaries. Do not continue to sue them and judges don’t continue to allow these excessive litigation cases against them.

Jeffrey Snyder, Broadcast Retirement Network

So John, we can expect that there are gonna be comments and there are gonna be challenges and we’ve got an election coming up in November. Even if these become final, let’s just say they become final July one. That’s a month following the end of the comment period.

Is everything written in stone? So can these regulations be unwound at some point by a different Congress or a different judge or a different administration?

John Schembari, Kutak Rock

Yeah, yeah. Congress can always undo regulations by changing the law. So if Congress were to amend ERISA in such a way that these regulations just don’t make sense anymore, Congress wins.

So that’s one factor. Prior to 2024, Jeff, judges would give a great deal of deference to agencies when they issue regulations. So if the Department of Labor came out with a regulation like this, prior to 2024, judges would say, all right, we’re gonna listen to the DOL.

We’re gonna kind of treat that regulation as if it is law written in stone. In 2024, the Supreme Court threw out that notion of deference to a federal agency. And now judges don’t have to give the Department of Labor any deference anymore.

So the Department of Labor can write these 164-page proposed regulations that are really thoughtful and give you a real good checklist of things to do. And a judge can say, yeah, we don’t really care. We think you need to do these 12 things to be a prudent fiduciary.

So I think the regulations are gonna withstand some scrutiny. I don’t know how much deference a judge will give them, but it’s important to note that the regulations are not pro-crypto, pro-private equity regulations. They are written asset neutral, and it’s general principles that fiduciaries should follow in selecting any investment in a retirement plan.

And that’s something that is probably gonna be difficult to be attacked from one side of the aisle or another. This is not a regulation that is, again, pro-crypto or pro an ESG style investment. This is an asset neutral regulation.

So it’s gonna be kind of hard to attack that, I think.

Jeffrey Snyder, Broadcast Retirement Network

Yeah, I guess the jury, the pun intended jury is gonna be out. Let me ask you before I let you go, and we’re gonna have to, this is an ongoing regulation in the retirement space and in any space is ongoing. So we’re gonna have to bring you back when it comes to benefits.

What are you hearing from clients? I mean, they rely on you and your firm to break things like this down. They rely on their financial advisor or their retirement plan advisor to help them do due diligence.

How are they reacting to these new rules and are they excited? Have you heard anything positive or negative or just anything?

John Schembari, Kutak Rock

Yeah, we haven’t heard too much yet from clients. It’s still pretty new. So they’re waiting for us to tell them what’s in this regulation and explain that.

For most of the clients that we work with, this is gonna be welcome news. This is gonna be, I’m gonna be telling them things that they’ve already been doing and considering. So it’s gonna give them a little peace of mind.

One thing that’s gonna kind of become real important here is the importance of fiduciaries understanding what their investment advisors are saying. So it’s not, the regulation is very clear. It’s not enough to have an investment advisor, which is a good thing.

It’s not enough just to have an investment advisor, but as a fiduciary, you need to understand what they’re saying. So when they come in and they start talking to you about sharp ratios and alpha and beta, you need, as a fiduciary, you need to be able to understand that before you make a decision. So I think that’s gonna open up opportunities for those fiduciary advisors that do a really good job in explaining the rationale behind their decisions.

And it’s gonna be a little bit of a challenge for some of those financial advisors that maybe don’t want to explain the rationale in a way that their clients can fully understand.

Jeffrey Snyder, Broadcast Retirement Network

Yeah, well, that fiduciary education, that’s why people rely on people like you, John, and people like BRN and other places, because you need to be educated. You can’t just defer and say, oh, I hired that person. You gotta be in the know.

You have responsibility to the beneficiaries of the retirement plan, of the benefit plan. John, we’re gonna have to, this has been a great conversation, a lot to unpack there. And I see a lot of webinars in yours and Kutak Rock’s future, but look, thanks for joining us.

And we look forward to having you back again on the program again very soon, sir.

John Schembari, Kutak Rock

Anytime, Jeff, thanks.

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