The American retirement system has helped millions prepare for a secure future through an engaged private sector that provides and administers retirement plans. These retirement plans are offered by employers and unions and administered by a variety of financial institutions. They are governed primarily by a federal law called the “Employee Retirement Income Security Act” (ERISA). The Department of Labor, which is ERISA’s primary regulator, is proposing big changes to some of its rules under ERISA that, if adopted as proposed, could upend the careful balance Congress struck between protecting plans and allowing them to invest and carry out other activities that are important to helping Americans prepare for retirement.

Congress enacted ERISA to protect retiree savings and protect against potential conflicts of interest between plans and the people and institutions that had close relationships to those plans. Congress modeled ERISA primarily on the common law of trusts and the safeguards established by the federal securities laws, but it went even further than either of these bodies of law by creating a new incredibly broad “prohibited transaction” regime. Under this prohibited transaction regime, virtually all transactions between plans and “parties in interest” to the plans (including plan sponsors and plan participants, and people or institutions that provide services to the plans like broker-dealers, banks, custodians, and investment managers) are prohibited unless an exemption applies. Failing to comply with these rules could lead to huge penalties and correction costs.

The prohibited transaction rules are so broad that even Supreme Court Justice Stephen Breyer had a hard time with them – here is what he said during oral argument in one ERISA case:

“My difficulty is probably something very basic…The prohibited transaction rule] seems to say you can’t buy services from somebody who sells you services…  It seems to say you can’t buy computers from a computer servicing company…  It seems to say you can’t buy investments from a stockbroker, and yet I thought that’s their job…  And so, there’s something basic I’m not understanding.”

–Oral Argument from Harris Trust v. Salomon Smith Barney Inc.

But Justice Breyer was not missing anything. Rather, to make the broad prohibited transaction regime workable and to make sure plans were not disadvantaged because they could not do business with so many people and companies, ERISA included some exemptions in the statute and, because Congress knew it could not think of every area where an exemption would be needed, it included a process for the Department of Labor to grant exemptions that it initiated or that individuals requested.  The Department is proposing a procedural rule that would all but do away with exemptions.

Congress intended that through the exemption process the statute would evolve and engage with the financial markets to help investors prepare for retirement. Even in 1974, Congress realized that plans, plan participants and beneficiaries would be disadvantaged if there were not certain obviously needed exemptions that were included in the statute.

Let me give you an example:  under ERISA, plan sponsors cannot pay people who provide services such as recordkeeping and investment management, so Congress included a statutory exemption for plans to pay reasonable compensation for services necessary for the operation of the plan.

Congress recognized it could not anticipate all potential transactions needing an exemption, Congress gave the Department the authority to grant either conditional or unconditional exemptions to allow markets to continue to function and to provide benefits to investors. The Department could initiate the process on its own, or plan sponsors, service providers, market participants and others could file for individual exemptions.

To make sure that exemptions would be granted only if they benefitted plans, Congress determined that the Secretary could grant an exemption only if it is (1) administratively feasible, (2) in the interests of the plan and of its participants and beneficiaries, and (3) protective of the rights of participants and beneficiaries of such plan.

Over the years, the Department has issued class exemptions to allow IRAs to be combined with personal accounts of the IRA owner and his family to receive lower asset management fees, or additional free securities trades, or higher interest rates on bank deposits, class exemptions to permit securities lending, and class exemptions to facilitate trading.

The Department has granted individual exemptions to allow automobile workers unions to establish funded health plans when their employers have filed for bankruptcy. In economic downturns, the Department has granted individual exemptions to provide liquidity (see 2008), address insurance company insolvency (see 2001), and to cover nonperforming assets (both downturns). All of these very helpful transactions were prohibited under ERISA, but recognizing their benefit to plans and participants, the Department granted individual exemptions which allowed these transactions.

Now the DOL is proposing to alter fundamentally the process for individuals to file for exemptions. The DOL’s proposal, if adopted would discourage people from even talking to the DOL about a potential exemption, let alone applying for one and in any case would make it nearly impossible to actually get an exemption (regardless of how helpful or protective it might be for a plan).

Using a procedural rule to eliminate individual exemptions is not what Congress had in mind when it put the prohibited transaction regime in place. Because ERISA prohibited all interactions between plans and parties in interest like financial institutions, the ability to get exemptions that would allow plans to engage in investment and other transactions that could benefit them but might be caught up in the overly broad prohibited transaction regime was a critical part of the new law.

We cannot predict where markets might turn next, and what particular exemptions will be necessary – just as policymakers in 1974 knew they could not predict what markets might look like in the decades to come and what exemptions may be needed.  Since, the long-in-place process already requires that any new exemption benefit the plan and participants, we can safely predict that eliminating the ability to get an individual exemption will lead to a worse result for plans. We fail to see how the Department’s intention to gut the exemptions process helps plans and their participants. We urge policymakers to reconsider this proposal with no clear upside and significant downside for Americans working to save for a successfully secure future.

SIFMA submitted a comment letter to the Department of Labor further detailing these concerns which can be found here.

Lisa Bleier is Managing Director and Associate General Counsel, Federal Government Relations at SIFMA.