Category Archives: Dept of Labor

Wisconsin Among 21 States to Challenge DOL’s New Overtime Rules

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By Sally A. Piefer

With less than 90 days before the Department of Labor’s new white collar overtime rules take effect, Wisconsin is among a group of 21 states challenging the Final Rule.

On May 18, 2016, the Department of Labor (“DOL”) issued Final Rules changing the eligibility for overtime for employees falling in the executive, administrative or professional exemptions. The Final Rule more than doubles the minimum salary necessary for an employer to consider a particular job exempt from overtime, increasing the salary threshold from $23,600 to $47,476 annually ($913 per week). In addition, the Final Rule provides for automatic indexing of the minimum salary threshold every three years. This new “salary” test is expected to affect approximately 4.2 million U.S. employees who are currently considered exempt. The Final Rule was set to take effect on December 1, 2016.

The lawsuit, filed yesterday in federal court in Texas, charges that the DOL failed to analyze the type of work that an employee is doing in these exempt classifications and simply determined that the amount of salary received by the employee was the best indicator of whether the employee fit within one of the exemptions. The DOL, the lawsuit claims, failed to consider any changes to the duties tests because those changes would have been “more difficult.”  They charge that salary should not be used as a “proxy” for duties and that employees who satisfy the duties portion of the test should still be considered exempt. In addition, the States challenge the automatic indexing because the use of automatic indexing is “without specific Congressional authorization” and is therefore invalid. Instead, if the DOL wants to use automatic indexing, the Plaintiff States say this process should go through the normal administrative agency notice and comment rulemaking process.

In addition, the lawsuit states that the payment of overtime to employees who will no longer be eligible to be considered exempt would force not only state and local governments – but also private employers – to substantially increase labor costs. Unlike private businesses, the Plaintiff States allege that state and local governments have fewer discretionary funds available and therefore have less ability to reduce costs or increase revenue. The result of the Final Rule, they claim, will force state and local governments to reduce or eliminate essential government services and functions.

The Plaintiff States allege that the Final Rule violates the 10th Amendment. The Tenth Amendment, a section of the Bill of Rights, essentially says that any power that is not given to the federal government is given to the people or the states. The States say that compliance with the Final Rule will impair the States’ ability to run their governments because of the huge impact the Final Rule will have on their respective budgets. The States ask the Court to declare the Final Rule invalid. At this point, the Plaintiff States have not sought immediate injunctive relieve preventing the rule from taking effect on December 1, 2016, but perhaps that will come as the deadline draws closer.

Other states joining Wisconsin in the lawsuit are Alabama, Arizona, Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Michigan, Mississippi, Nebraska, Nevada, New Mexico, Ohio, Oklahoma, South Carolina, Texas, and Utah.

Shortly after this lawsuit was filed, the U.S. Chamber of Commerce and fifty different business groups also filed suit in federal court in Texas challenging the Final Rule. The Chamber’s lawsuit also alleges that the Final Rule disqualifies millions of employees from the executive, administrative, and professional employee exemption and that “the new salary threshold is no longer a plausible proxy for the categories exempted from the overtime requirement.”  The lawsuit also argues that the automatic update to the salary threshold every three years without rulemaking or seeking input from stakeholders is not authorized under the law.

Lindner & Marsack, S.C. will continue to keep you posted on further developments. However, in the interim, you should proceed as though the Final Rule will take effect on December 1, 2016, so that you are not scrambling or putting your business in jeopardy of running afoul of the Final Rule.

For more information about the DOL’s new overtime exemption rules or your general employment law needs, please contact Attorney Sally Piefer at (414) 226-4818 or spiefer@lindner-marsack.com or any of the other attorneys you work with at Lindner & Marsack, S.C.

Department of Labor Issues Final Rule on FLSA Exemptions

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By Oyvind Wistrom

The U.S. Department of Labor issued its much-anticipated final overtime exemption rule on May 18, 2016, raising the minimum salary threshold required to qualify for the Fair Labor Standards Act’s (FLSA) “white collar” exemptions to $47,476 per year ($913 weekly).  The new salary test will apply to all administrative, professional, executive, outside sales and computer employees who are treated as exempt and salaried under the FLSA.  This new rule will affect approximately 4.2 million U.S. workers who are currently treated as exempt, but who would not satisfy the new salary test under the FLSA.

The rule has been a long time coming.  The first version of the new rule was proposed in June 2015 and drew approximately 300,000 public comments between June and September 2015.  That first version of the rule would have more than doubled the salary threshold from $23,660 per year ($455 weekly) to $50,440 per year ($970 weekly).  The final rule just issued still doubles the salary threshold, but reduced the proposed salary threshold by approximately $3,000.  The rule will take effect on December 1, 2016.

Under previous regulations, employees had to meet certain tests related to job duties and be paid at least $23,660 per year ($455 weekly) on a salary basis to be exempt from the minimum wage and overtime requirements under the FLSA.  While DOL’s final rule raises the salary level significantly, non-discretionary bonuses and incentive payments can now count for up to 10 percent of the new salary level, provided the payments are made at least quarterly.  This change has been viewed by some commentators as DOL “throwing employers a bone” in the final rule.  In addition, this new salary threshold will be automatically updated every three years to ensure it stays at the 40th percentile benchmark, according to the Obama administration.  The final rule also raises the overtime eligibility threshold for “highly compensated” workers from $100,000 annually to $134,004 annually.

Employers have a range of options in responding to the updated standard salary level.  For all employees who are currently treated as exempt under the FLSA’s “white collar” exemptions, but who are paid less than $47,476 per year ($913 weekly), the following options exist:

  • Increase the salary of the employee to at least the new salary level to maintain his or her exempt status;
  • Convert the salary to an hourly rate and pay the overtime premium (one and one-half times the employee’s regular rate of pay) for all hours worked in excess of 40 hours in a week;
  • Control, reduce or eliminate overtime hours;
  • Reduce the amount of pay allocated to base salary (provided that the employee still earns at least the applicable hourly minimum wage) in order to account for overtime hours worked in excess of 40 hours (paying employee time and one-half for all overtime hours), to hold total weekly pay constant; or
  • Use some combination of these responses.

In determining which course of action to utilize, employers should analyze their workforce and determine which solution best suits their particular needs.  For salaried, exempt employees who regularly work overtime and currently earn slightly below the new standard salary level, employers may be best suited to raise the employees’ salaries to the new salary level to retain the “white collar” exemption.  For employees who rarely or almost never work overtime hours, employers may be best suited to start treating those employees as non-exempt, pay the employees a standard hourly rate, and pay the overtime premium when necessary.

If you have questions about this material, please contact Oyvind Wistrom by email at owistrom@lindner-marsack.com or by phone at (414) 273-3910, or any other attorney you have been working with here at Lindner & Marsack, S.C.

DOL ISSUES GUIDANCE EMPHASIZING ITS FOCUS ON MISCLASSIFICATION

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By: Laurie A. Petersen and Samantha J. Wood

The U.S. Department of Labor (“DOL”) has issued new guidance reiterating its focus on misclassification of employees as independent contractors and warning employers that “most workers are employees.”

The DOL has asserted that the purpose of its guidance is to provide clear direction to employers regarding the classification of workers as independent contractors. It asserts that employers should apply the multi-factorial “economic realities,” test, which focuses on whether the worker is truly in business for him or herself. Under this test, employers should consider and weigh the following factors: (1) the extent to which the work performed is an integral part of the employer’s business; (2) the worker’s opportunity for profit or loss depending on his/her managerial skill; (3) the extent of the relative investments of the employer and the worker; (4) whether the work performed requires special skills and initiative; (5) the permanency of the relationship; and (6) the degree of control exercised or retained by the employer. The DOL asserts that all of the factors should be considered and weighed together in each case, and that no one factor, such as the control factor, is determinative.

While the guidance does not announce a new standard to be applied in analyzing whether a worker is an employee or independent contractor, it asserts that the application of the economic realities test should be guided by the Fair Labor Standard Act’s definition of the term “employ.” The FLSA provides an expansive scope of the employee-employer relationship by broadly defining the term “employ,” to mean “to suffer or permit to work.” Applying the economic realities test to the broad scope of the employee-employer relationship, the DOL concludes that most workers should be classified as employees under the FLSA.

In light of this guidance, employers should carefully examine their classification of workers to prepare themselves for DOL audits and protect themselves from costly misclassification litigation and liability. Indeed, if it is found that an employer misclassified employees as independent contractors, the financial consequences could include the following: liability for employment withholding taxes, failure to pay tax penalties, minimum wage, overtime compensation, unemployment insurance, workers’ compensation, and ACA penalties for failing to provide minimum essential health-care coverage.

If you have questions about this material, please contact Laurie A. Petersen or Samantha J. Wood by email at lpetersen@lindner-marsack.com or swood@lindner-marsack.com, or any other attorney you have been working with here at Lindner & Marsack, S.C.

DOL’S PROPOSED CHANGES TO THE OVERTIME REGULATIONS SEEK TO RAISE THE SALARY THRESHOLD FOR EXEMPT EMPLOYEES TO $970 A WEEK

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By:  Laurie A. Petersen and Samantha J. Wood

As directed by President Obama in March 2014, the Department of Labor (DOL) has issued a proposed rule regarding the Fair Labor Standard Act’s overtime regulations.

The rule focuses primarily on updating salary and compensation levels.  It proposes increasing the standard salary threshold level for exempt employees from $455 a week to approximately $970 a week.  This increase would set the standard salary level at the 40th percentile of weekly earnings for full-time salaried workers (nationwide) in 2016.  While the standard salary level was set at the 20th percentile of weekly earnings for full-time salaried workers in 2004, the DOL states that an increase is necessary to fully account for the simplified duties test that was created in the DOL’s 2004 changes.

The rule also proposes salary increases to the “highly compensated employee” exemption.  Currently, the regulations provide an exemption for employees if they earn at least $100,000 in total annual compensation and customarily and regularly perform any one or more of the exempt duties or responsibilities of an executive, administrative or professional employee.  The DOL is proposing increasing this figure to $122,148, which would set the salary standard at the 90th percentile of all full-time salaried workers.

Furthermore, the DOL has proposed a mechanism for annually updating the salary and compensation levels going forward.  It is considering and is seeking commentary on two possible methodologies: (1) annually updating the thresholds based on a fixed percentile of earnings for full-time salaried workers, or (2) annually updating the thresholds based on changes in the Consumer Price Index for all Urban Consumers (CPI-U).

Despite these drastic changes, the DOL has included a silver lining for employers.  The DOL has proposed allowing non-discretionary bonuses and incentive payments, such as bonuses tied to productivity and profitability, to count toward 10% of the standard weekly salary level of $970, for the executive, administrative, and professional exemptions.  In order to include the bonuses within the salary, the bonuses would have to be non-discretionary and employees would need to receive the bonuses more frequently than annually (i.e., monthly or quarterly, rather than a yearly “catch-up” payment).

While the DOL is not proposing any specific changes to the standard duties tests, it is seeking commentary to determine whether, in light of the salary level proposal, changes to the duties tests are necessary.

Upon publication of the proposed rule, the public is encouraged to provide commentary through the online portal at www.regulations.gov under Rule Identification Number 1235-AA11.  After considering the comments, the DOL will make revisions to its rule and will issue a Final Rule sometime thereafter.

If you have questions about this material, please contact Laurie A. Petersen or Samantha J. Wood by email at lpetersen@lindner-marsack.com or swood@lindner-marsack.com, or any other attorney you have been working with here at Lindner & Marsack, S.C.

DOL ISSUES GUIDANCE ON RIGHTS OF SAME-SEX SPOUSES FOR ERISA PLANS

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By: Alan M. Levy

On September 18, 2013 the U.S. Department of Labor (“DOL”) issued Technical Release 2013-04 to address ERISA rights for same-sex spouses after the Supreme Court’s decision in United States v. Windsor, 133 S. Ct. 2675 (2013), invalidated parts of the federal Defense of Marriage Act. Largely consistent with the equivalent discussion from the Internal Revenue Service, Rev. Rul. 2013-17, DOL has stated that it will require that legally married same-sex spouses be treated under ERISA benefit plans in the same manner it has always applied for those in opposite-sex marriages.

The test for being “legally married” is based on the law in the state where the marriage ceremony took place, so, for example, a same-sex couple married in Iowa, New York, or Minnesota is considered legally married for purposes of federal law even if they subsequently live in a state (like Wisconsin) which does not recognize that marriage. For this reason, Wisconsin employers must be alert to the federal rules if any of their employees seek these benefits.

The two same-sex spouses then have all the ERISA rights of an opposite-sex married couple. In ERISA-governed retirement plans, each can be the “surviving spouse” of the other, and ERISA “joint and survivor” spouse benefits must apply to both. When the retirement plan rules require notice to or consent from a spouse (as when a participant designates a beneficiary or selects a joint and survivor retirement benefit), the same-sex spouse has the same rights to be notified and the same power to consent (or not) as the spouse in an opposite-sex marriage. Similarly, a same-sex couple who obtain a legal divorce can utilize a Qualified Domestic Relation Order (“QDRO”) to require that the participant’s same-sex former spouse receives part of the participant’s benefit.

The rules for ERISA welfare plans – including employer-provided health insurance – are somewhat less certain because a welfare plan may exclude a spouse regardless of gender. However, a health plan which only provides employee benefits to a spouse of the opposite sex and excludes a same-sex spouse is an invitation to litigation.

Employers should review their ERISA plan documents and amend those references which would improperly deny spousal benefits to same-sex spouses. Currently, all such references must be updated by December 31, 2013; although there are indications that IRS will extend this deadline, no announcement of that relief has yet been issued.

Should you have any questions about these new requirements and how they are to be enforced, please contact Alan M. Levy, an attorney with Lindner & Marsack who focuses on employee benefits.

NEW FEDERAL REQUIREMENTS IMPOSING HIRING GOALS FOR VETERANS AND PEOPLE WITH DISABILITIES TO AFFECT APPROXIMATELY 171,000 COMPANIES

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By: Laurie A. Petersen and Samantha J. Wood

On August 27, the U.S. Department of Labor’s Office of Federal Contract Compliance Programs (OFCCP) announced a Final Rule that makes changes to the regulations implementing the Vietnam Era Veterans’ Readjustment Assistance Act (VEVRAA) and Section 503 of the Rehabilitation Act of 1973. These changes are intended to improve hiring of veterans and people with disabilities.

The Final Rule will make the following changes to the regulations affecting VEVRAA:

  1. It will completely rescind 41 C.F.R. 60-250 and replace it with the revised 41 C.F.R. 60-300. Veterans who were formerly protected only under 41 C.F.R. 60-250 will be protected from discrimination under 41 C.F.R. 60-300.
  2. It will require federal contractors and subcontractors to establish annual hiring benchmarks. It will require federal contractors to either:A. Adopt a hiring benchmark equal to the national percentage

of veterans in the civilian labor force (currently 8 percent); or

B. Establish their own benchmark by taking into account (i) the average percentage of veterans in the civilian labor force in the state where the contractor is located over the preceding three years; (ii) the number of veterans, over the previous four quarters, who participated in the employment service delivery system in the state where the contractor is located;

(iii) the applicant and hiring ratios for the previous year; (iv) the contractor’s recent assessments of the effectiveness of its outreach and recruitment efforts; and (v) any other factors, such as the nature of the job and its location, that would affect the availability of qualified protected veterans.

3. It will require federal contractors to annually document and update, and maintain for three years the following quantitative comparisons regarding applicants and employees:

A. The number of protected veteran applicants;

  1. The total number of job openings and number of jobs filled;
  2. The total number of applicants for all jobs;
  3. The total number of protected veterans applicants hired; and
  4. The total number of applicants hired.
  1. Beyond records comparing applicants, employees, and the hiring benchmark requirement, it will require records to contain an evaluation of outreach and recruitment efforts. Companies must be able to provide documentation to show that they have tried to meet the benchmark otherwise they risk having their federal contracts revoked.
  2. It will require federal contractors to make the following adjustments to its hiring process:
    1. Contractors must invite applicants to self-identify as protected veterans at both the pre-offer and post-offer phases of the application process.
    2. When listing a job opening, contractors must provide information in a manner and format permitted by the

appropriate State or local job service.

  1. It will require federal contractors to use specific language when incorporating the equal opportunity clause into a subcontract by reference to alert subcontractors to their responsibilities as Federal contractors.
  2. It will require contractors to provide OFCCP all records upon request and allow OFCCP to complete a compliance check either

on or off-site.

The Final Rule will make the following changes to the regulations implementing Section 503 of the Rehabilitation Act of 1973 at 41 C.F.R. 60- 741:

  1. It will implement changes necessitated by the passage of the ADA Amendments Act of 2008 by revising the definition of “disability” and certain nondiscrimination provisions.
  2. It will require federal contractors to adopt a hiring goal of 7 percent to each of their job groups or to their entire workforce if the

contractor has 100 or fewer employees.

3. It will require federal contractors to annually document and update, and maintain for three years the following quantitative comparisons regarding applicants and employees:

A. B. C. D. E.

The number of applicants disabilities;
The total number of job openings and number of jobs filled; The total number of applicants for all jobs;
The total number of applicants with disabilities hired; and The total number of applicants hired.

4. It will
problem areas and establish specific action-oriented programs to address the problems.

require federal contractors to conduct annual assessments of

5. It will require federal contractors to make the following adjustments to its hiring process:

A. Contractors must invite applicants to self-identify as individuals with disabilities at both the pre-offer and post-

offer phases of the application process.

B. When listing a job opening, contractors must provide information in a manner and format permitted by the appropriate State or local job service.

6. It will require federal contractors to invite employees to self- identify as individuals with disabilities every five years.

7. It will require federal contractors to use specific language when

incorporating the equal opportunity clause into a subcontract by reference to alert subcontractors to their responsibilities as Federal contractors.

8. It will require contractors to allow OFCCP to request and review documents related to a compliance check either on or off-site.

According to the director of OFCCP, such new rules are expected to affect approximately 171,000 companies doing business with the federal government. Although these rules will not become effective for 180 days after publication in the Federal Register, contractors are encouraged to

begin updating their employment practices as soon as possible.

If you have questions about this material, please contact Laurie A. Petersen or Samantha J. Wood by email at lpetersen@lindner-marsack.com or swood@lindner-marsack.com, or any other attorney you have been working with here at Lindner & Marsack, S.C.

OFCCP PROPOSED RULE SEEKS TO INCREASE DISABILITY HIRING

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By: Laurie A. Petersen and Kristofor L. Hanson

On December 9, 2011, the Department of Labor’s Office of Federal Contract Compliance Programs (“OFCCP”), published a Notice of Proposed Rulemaking, which if implemented, would impose significant changes on companies doing business with the federal government with respect to their hiring of persons with disabilities. The rule looks to set a hiring goal
for workers with disabilities’ proposed at 7% of federal contractors’ workforces’ and would establish for the first time, a single, national utilization goal for individuals with disabilities.

The proposed rule does not set 7% as a quota or a restrictive hiring ceiling. Nor does failure to achieve 7% hiring of persons with disabilities necessarily constitute a violation of Section 503 of the Rehabilitation Act of 1973, which the proposed rule seeks to amend. The OFCCP director stated that the focus of the rule will be on determining whether covered contractors are following required steps related to recruitment, notification of job openings, and accessible hiring procedures.

Under the rule the definitions of “disability,” “major life activities,” “substantially limits,” and other statutory terms within the existing Section 503 regulations to conform with the ADA Amendments Act (“ADAAA”) and the Equal Employment Opportunity Commission’s final regulations implementing that new law, which amended the Rehabilitation Act as well as the ADA.

The proposed rule makes substantive changes to a federal contractor’s responsibilities and the manner in which applicants are invited to voluntarily self-identify as individuals with disabilities during the hiring process. Contractors also shall invite employees to self-identify as disabled post-offer. The pre-offer self-identification process is designed to assist contractors and OFCCP in determining the number of individuals with disabilities who apply for jobs with contractors.

In addition, the proposed rule adds a new requirement that contractors annually survey their employees, providing an opportunity for each employee who is, or subsequently becomes, an individual with a disability to voluntarily self-identify as such in an anonymous manner, thereby
allowing those who have subsequently become disabled or who did not wish to self-identify during the hiring process to be counted. The purpose of the annual survey is to provide contractors and the OFCCP with a data collection tool to establish a baseline percentage of disabled employees and to better identify and monitor the contractor’s hiring and selection
practices with respect to individuals with disabilities. The OFCCP believes that assuring anonymity of employee response to the annual survey will likely increase the response rate, thus providing that the most accurate data possible is available to assist contractors and OFCCP. This data is designed to assist contractors and OFCCP in evaluating and refining
contractors’ affirmative action efforts. Surveying of employees may be accomplished by the contractor using a paper and/or electronic format, using the method(s) generally used by the contractor to communicate with employees regarding work-related matters. The OFCCP will provide suggested language for the self-identification inquiries and is seeking comments on the language prior to implementation.

Contractors would also have to annually review their personnel policies to assure that their affirmative action plan obligations are being met. Likewise, contractors would be required to annually review their outreach and recruitment efforts to evaluate their effectiveness in identifying and recruiting qualified individuals with disabilities, and to document the review. In addition, contractors would have to establish “linkage agreements” and “ongoing relationships” with state vocational rehabilitation agencies or local organizations listed in the Social Security
Administration’s Ticket to Work employment network directory.

Federal contractors would also be required for the first time to develop and implement written procedures for processing requests for reasonable accommodation under the rule. The purpose of developing these written procedures, according to the OFCCP, would be to assure that applicants and employees have clear instructions on how to request accommodations
and know the reason an accommodation request has been denied. In addition, the rule would assist federal contractors in assuring they are satisfying their reasonable accommodation requirements.

The significant changes in the proposed rule should be reviewed closely by all employers doing business with the federal government. Contractors should also review their current disability hiring and retention policies, as well as their reasonable accommodation guidelines, to assure that they are making proper efforts to accommodate individuals with disabilities, both
at the hiring phase and during active employment.

No implementation date has been set, but OFCCP is accepting comments on this Notice of Proposed Rulemaking through February 7, 2012. Comments, identified by RIN number 1250-AA02, may be submitted online at http://www.regulations.gov; by fax (if six pages or less) to (202) 693-1304; or by mail to: Debra A. Carr, Director, Division of Policy, Planning, and Program Development, Office of Federal Contractor Compliance Programs, Room C-3325, 200 Constitution Ave. NW, Washington, DC 20210.

If you have any questions about this material, please contact Laurie Petersen or Kris Hanson or any other attorney you have been working with here at Lindner & Marsack, S.C.

US DEPT OF LABOR ISSUES FINAL RULES ON INVESTMENT ADVICE FOR PARTICIPANT-DIRECTED INDIVIDUAL ACCOUNTS

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By: Alan M. Levy

Long-awaited final rules for providing investment advice to participants and beneficiaries of 401(k) plans and other retirement programs which utilize participant-directed individual accounts were issued by the U.S. Department of Labor (“DOL”) on October 25, 2011. They will be effective December 27, 2011.

A by-product of defined contribution plans supplanting defined benefit plans has been minimization of plan sponsors’ potential fiduciary liability by authorizing plan participants to make their own investment decisions through self-directed individual accounts. As this change evolved, many plan sponsors and fiduciaries arranged for investment advisers to assist their plan participants in making these decisions, often using experts who were themselves employed by some kind of investment management or securities sales enterprise. In 2006, recognizing a possible conflict of interest in these arrangements, Congress, in the Pension Protection Act (“PPA”), defined allowable parameters for this type of plan activity.

Anyone who controls a plan asset is a fiduciary of that plan. The administrator of a defined contribution plan who manages the investment of assets for those participants who decline to make their own investment directions is subject to fiduciary liability for the prudence and reasonableness of those investment choices. If the fiduciary retains an investment expert who manages the undirected accounts and/or advises participants as to their individual investments, the choice of that expert is also subject to fiduciary liability. And to the extent the expert may have the authority to direct decisions as to the investment of any fund assets in a general “default account” or individual accounts, that expert is also subject to fiduciary duties and liabilities.

The PPA, and the DOL regulations implementing it, now provide an exemption from any claims of prohibited transactions (typically cases involving a fiduciary who may gain some fee, profit, or advantage from a transaction involving plan assets) for the use of investment advisers in the following circumstances:

  • The investment adviser must use (a) a “fee-leveling” compensation system by which he/she receives the same fee no matter what choice of investment is made. The adviser cannot receive a larger payment, such as a commission dependant on the dollar amount of the transaction, if he/she convinces the participant to select one investment choice over another. In the alternative, the adviser must use (b) a computer model system for providing advice or managing assets.
  • The fee-leveling system’s “advice must be based on generally accepted investment theories that take into account historic returns of different asset classes over defined periods of time, but also notes [other] generally accepted investment theories including investment management and other fees and expenses attendant to the recommended investments.” The adviser must also consider “information related to age, time horizons (e.g., life expectancy, retirement age), risk tolerance, current investments, other assets or sources of income, and investment preferences of the participant or beneficiary.” 29 CFR Vol. 76, No. 206, 10/25/11, p. 66138, Pt. 2550, RIN 1210-AB35. In turn, the adviser must request this information from the employer and the participant. Use of a computer model system must take into account similar data and investment theories.
  • The adviser must be certified pursuant to requirements stated in the DOL regulations.
  • An independent audit must be conducted annually to assure compliance with these structural requirements, and the adviser must provide a copy of the audit to the plan fiduciary. “Selection of the auditor is a fiduciary act,” Id., 66147, for which the fiduciary is responsible.
  • A number of disclosures must be provided by the adviser to the participants, “written in a clear and conspicuous manner – calculated to be understood by an average plan participant and must be sufficiently accurate and comprehensive .” Id. This may be done by written or electronic communication. Similar information must be provided by the adviser to the plan fiduciary.
  • The “arrangement pursuant to which investment advice is provided must be expressly authorized by a plan fiduciary.” Id., 66144.

While the retention of the adviser pursuant to these provisions will exempt the fiduciary from any charge of a prohibited transaction, the plan sponsor or fiduciary will have a fiduciary liability for any failure to monitor the adviser’s selection of the adviser and his/her subsequent activities. “[I]ntentional, regular, deliberate practices involving more than isolated events or individuals, or institutionalized practices will almost always constitute a pattern or practice” for which a fiduciary may be held personally liable.

As a general matter, self-directed accounts for employees/participants should limit potential liability for plan sponsors, administrators, and fiduciaries. Use of a certified investment adviser to assist participants in the investment of the assets in their accounts will strengthen these limits, but the appropriate selection and monitoring of the adviser to assure his/her compliance with these rules is essential to preserving that protection.

This is a new and broad-sweeping regulation, and it will inevitably be challenged, clarified, and refined as it is implemented by DOL. Investment advisers will have to comply with the rule, and plan fiduciaries will have to make sure they do so. The prohibited transaction exemptions here will be nullified by any “pattern or practice” of noncompliance.

If you have any questions about the application or implementation of this Regulation, please contact Alan Levy, here at Lindner & Marsack, S.C., for further explanation and assistance.