PLANADVISER - November/December 2022 - 7

" Large investment advisers servicing
retirement plan clients are presently
devoting significant time and
resources with respect to the vetting
and monitoring of third-party providers,
and the proposed SEC regulations,
if adopted, would have a limited
impact upon them, " Wagner says.
" However, for small firms that have not
previously performed the due diligence
requirements ..., there will very likely
be a significant cost increase, whether
the adviser exercises increased oversight
or brings the previously outsourced
functions in-house. "
In a 232-page report, the SEC said
the determination of what obligations
should be given due diligence would
depend on the " facts and circumstances. "
It cited examples such as third
parties providing: custom indexes;
investment risk software or services;
portfolio management; trading
services or software; and investment
advisory services. " An adviser should
be overseeing outsourced functions to
ensure the adviser's legal obligations
are continuing to be met despite the
adviser not performing those functions
itself, " the SEC wrote in the proposal.
The public comment period for this
proposal is open until December 27. If
the proposal
is adopted, a 10-month
transition period will follow.
DOL Finalizes ESG Investing
Rule for Retirement Plans
The Department of Labor, November
22, announced a final rule permitting
retirement plan fiduciaries to
consider climate change and other
environmental, social and governance
factors when selecting investments
for defined contribution plans. This
overturns a rule enacted under former
President Donald Trump that fiduciaries
consider only " pecuniary " factors.
Under President Joe Biden, this
DOL ruling takes the stance that fiduciaries
have an obligation to consider
ESG factors to " protect the life savings
and pensions of America's workers and
families from the threats of climaterelated
financial risk. "
Under the rule, fiduciaries may
also consider climate change and ESG
factors when selecting a qualified
default investment alternative and
exercising shareholder rights such
as proxy voting. The Prudence and
Loyalty in Selecting Plan Investments
and Exercising Shareholder Rights rule
comes at the direction of an executive
order Biden signed May 20, 2021. It will
be effective 60 days after its publication
in the Federal Register.
The IRS Extends
Determination Letter
Program to 403(b) Plans
Starting next June, the IRS will permit
either employers wishing to add a
new individually designed 403(b) plan,
current sponsors of such a plan making
major changes or sponsors terminating
an individually designed 403(b) plan to
request an initial determination letter
using the same program employed by
401(k) and other plans qualified under
Internal Revenue Code Section 401(a).
Revenue Procedure 2022-40
expands an IRS and Treasury program
for approving retirement plans,
allowing 403(b)s-which are used by
certain public schools, churches and
charities-to apply for the same taxfavored
treatment as qualified retirement
plans.
The implementation of the new
rule will be staggered according to IRS
employer identification number. Plan
sponsors with an EIN ending in 1, 2 or
3 may request a determination letter,
starting June 1, 2023. Sponsors with a
number ending in 4, 5, 6 or 7 must wait
until June 1, 2024; those with a number
ending in 8, 9 or 0 must wait until June
1, 2025. Any terminating 403(b) plan,
regardless of EIN, may request a plan
termination letter, starting June 1, 2023.
Determination letters are often
used by qualified retirement plans to
seek official approval from the IRS,
says Robert Abramowitz, an employee
benefits attorney and partner in
Morgan Lewis. Though these letters
are not required by law, requesting one
is standard practice for sponsors of
large 401(a) qualified retirement plans.
The letters are essentially an insurance
policy against having a plan
design that fails to comply with IRS
rules as to form. Applying for a letter
also permits an employer to discover,
through the IRS' review of the plan,
any issues in the plan, which may
be corrected going forward or before
adopting it.
Having a letter is also a way to
avoid IRS audits. Additionally, sometimes
a third party, such as a creditor,
will ask a sponsor to obtain or share its
determination letter as a condition of
service, Abramowitz explains.
Abramowitz calls Rev. Proc. 2022-40
" a big change " for the plans and a
change to their benefit. It will streamline
the process of plan adoption by
making it closer to that for qualified
retirement plans.
Individually designed 403(b) plans
were unable to get approval from the
IRS prior to this change, notes David
Ashner, an employee benefits attorney
at Groom Law Group Chartered.
Abramowitz cautions, however,
that, while this is " good news for
many, " those sponsors of long-standing
403(b) plans that seek a determination
letter may have long-standing problems
revealed as part of the process.
He explains that sponsors of older
plans should " be careful what you ask
for. The IRS looks at things carefully. "
He, too, points out that sponsors
normally seek determination as part
of initial plan adoption to avoid having
to correct issues down the road.
Many 403(b) sponsors are institutions
such as universities, which
often have highly unique plans that
go back decades, Ashner says. This
change is something 403(b) sponsors
have wanted for a long time, and there
should " be a lot of interest " in acquiring
determination letters, he says.
Recovery of Improper
Executive Incentive Pay
The Securities and Exchange Commission
adopted a new rule requiring securities
exchanges to create and enforce
listing standards that demand issuers
to recover executive incentive pay that
was improperly awarded, sometimes
referred to as a " clawback. "
This requirement was part of the
Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010, which
amended the Securities and Exchange
Act of 1934. The SEC issued the new
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PLANADVISER - November/December 2022

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