DOL Issues New Fiduciary Rule
August 2016 Newsletter
On April 8, 2016 the Department of Labor (DOL) issued
final guidance that greatly expands the types of retirement investment advice
that will be subject to the fiduciary duty rules under the Employee Retirement
Income Security Act of 1974 (ERISA). The so-called "conflict of interest" rule
for retirement investments will have a significant effect on those who provide
investment advice and sell investment products and services to retirement plans
and IRAs. The central focus of the DOL guidance is to protect plan participants
from conflicts of interest that could threaten their retirement savings.
The new rule will not apply until April 10, 2017. The rule has proved
controversial and numerous lawsuits have been filed by industry groups and the
U.S. Chamber of Commerce challenging the new rule. Plaintiffs argue that "The
rule and [prohibited transaction exemptions] overstep the Department's
authority, create unwarranted burdens and liabilities, undermine the interests
of retirement savers, and are contrary to law." President Obama has vetoed a
resolution to kill the rule which was approved by the House in April and the
Senate in May.
This new guidance was prompted by the changing landscape of retirement plans
over the past 40 years with the shift from employer-sponsored defined benefit
plans, with no participant investment responsibility, to participant directed
401(k) plans. When the old fiduciary rules were issued in 1975, 401(k) plans did
not exist nor did the now common practice of rolling assets of ERISA plans into
IRAs. Under the old rules, a person or institution is considered a fiduciary
adviser only if a five-part investment advice test is satisfied.
In today's marketplace, plan sponsors may be surprised to learn that many
investment professionals, consultants and advisers have no obligation to adhere
to ERISA's fiduciary standards because they do not satisfy the five-part test.
Without fiduciary obligation, advisers could potentially give imprudent advice
or steer investment decisions towards products that would affect the amount of
compensation the adviser would receive for the advice.
The DOL cited this and other factors to justify the expanded definition of
investment-advise fiduciary. Fiduciaries are subject to heightened standards of
care and must provide impartial advice solely in the best interest of the
recipient of the advice and, if found in breach of the fiduciary standards, can
be subject to personal liability.
Activities Considered Investment Advice
Under the regulation, a party is treated as providing "investment advice" if
it renders any of the following general categories of recommendations for a fee
or other compensation (either directly or indirectly) to a plan, plan fiduciary,
plan participant or beneficiary, IRA or IRA owner:
- The advisability of buying, holding, selling or exchanging securities or
other investment property;
- The management of securities or other investment property such as advice
regarding investment portfolio composition, selection of other persons to
provide investment advice or management services or selection of investment
- Rollovers, transfers or distributions from a plan or IRA including
whether, in what amount, in what form and to what destination such rollover,
transfer or distribution should be made; or
- How to invest securities or other investment property once they are
rolled over, transferred or distributed from the plan or IRA.
A "recommendation" is broadly defined by the DOL as any "communication that,
based on its content, context, and presentation, would reasonably be viewed as a
suggestion that the advice recipient engage in or refrain from taking a
particular course of action."
Advice Provider Relationship
The regulation sets forth the types of relationships that must exist for such
"recommendations" to give rise to fiduciary investment advice responsibilities.
A person providing the type of advice described above (either directly or
indirectly, such as through an affiliate) is a fiduciary if the party:
- Represents or acknowledges that it is acting as a fiduciary within the
meaning of ERISA or the Internal Revenue Code (Code);
- Renders investment advice pursuant to a written or verbal agreement,
arrangement or understanding that the advice is based on the recipient's
particular investment needs; or
- Directs the investment advice to a specific recipient or group of
recipients regarding the advisability of investing in a particular
investment or offers advice regarding the management of investment property.
A party providing investment advice must receive a "fee or other
compensation," either directly or indirectly, for such advice in order for the
party to be a fiduciary under ERISA and applicable Code provisions. "Fee or
other compensation" includes, but is not limited to, such things as commissions,
loads, finder's fees and revenue sharing.
Activities not Considered Investment Advice
The regulation describes the following services, communications and materials
as generally not involving a "recommendation."
Providing an Investment Platform for Directed Investment
Service providers, such as recordkeepers and third-party administrators,
often offer a "platform" or selection of investment alternatives from which plan
fiduciaries may choose when creating the plan's menu of investment options.
Simply marketing or making available the platform of investment alternatives,
without regard to the individualized needs of the plan or its participants and
beneficiaries, is not a recommendation under the regulation. This exception is
subject to two conditions:
- The platform provider must
disclose in writing to the plan fiduciary that it is not providing impartial
investment advice or giving advice in a fiduciary capacity; and
- The plan fiduciary selecting the
platform must be independent of the platform provider.
Selection and Monitoring Assistance for Plan Fiduciaries
Identifying investment options that satisfy the pre-established criteria of
the plan fiduciary (e.g., expense ratios, size of fund, type of asset, etc.) is
not considered a recommendation. The provider must disclose in writing any
financial interest in any of the investment alternatives. Also, providing
objective financial data and comparisons with independent benchmarks to the plan
fiduciary is not considered a recommendation.
Generally the following kinds of investment information and materials will
not be treated as recommendations:
- Plan information including benefits or participation, forms of
distributions, fee/expense information;
- General financial, investment or retirement information such as
retirement-related risks (e.g., longevity, inflation), diversification and
- Asset allocation models projecting return based on hypothetical fact
- Interactive investment materials (questionnaires, worksheets, software)
allowing plan participants to calculate retirement needs and income.
Advice Provided by Employees
The DOL recognized that the expanded fiduciary definition could potentially
cause employees of a plan sponsor to be treated as fiduciaries and that an
explicit exception was appropriate. Employees of a plan sponsor, such as those
working in employee benefits and human resources departments, may provide advice
in connection with certain matters without becoming an investment advice
fiduciary if the employee does not receive compensation for the advice beyond
the normal compensation for work provided for the employer and other conditions
This exclusion covers employees who routinely develop reports and
recommendations for the company and other fiduciaries such as an investment
committee member suggesting to others on the committee that they consider adding
a specific investment to the plan's portfolio. The exclusion also covers
employees who are charged with communicating information about the plan and
distribution options to other employees as long as the employee's job
responsibility does not involve the provision of investment advice and the
employee is not licensed to provide investment advice.
Providing general investment communications that a reasonable person would
not view as investment advice would not be viewed as investment recommendations.
Examples given by the DOL of some communications that should meet this exception
include general circulation newsletters, public media talk show commentary,
remarks at widely attended speeches and conferences, general marketing materials
and general market data.
Best Interest Contract (BIC) Exemption
ERISA and the Code generally prohibit fiduciaries from receiving payments
from third parties and from acting on conflicts of interest, including using
their authority to affect or increase their own compensation, in connection with
transactions involving a plan or IRA. Certain types of fees and compensation
common in the retail market may fall within these prohibitions when received by
fiduciaries. To facilitate continued provision of advice to such retail
investors under conditions designed to safeguard the interest of these
investors, the BIC exemption was included in the regulation and allows
investment advice fiduciaries to receive these various forms of compensation
that, in the absence of an exemption, would not be permitted under ERISA and the
As a condition of receiving compensation that would otherwise be prohibited,
financial institutions and advisers are required to take several protective
steps to mitigate the impact of any conflicts of interest, such as acknowledging
their fiduciary status, implementing policies and procedures designed to prevent
conflict of interest violations, disclosing information about their conflicts of
interest and the cost of their advice and receiving no more than reasonable
What Plan Sponsors Need to Know
While the final rule is targeted primarily at providers of retirement plan
products and services, it will also affect plan sponsors. Plan sponsors should
expect to receive new disclosures and amended contracts from their advisers and
need to review and understand the nature of the relationships they have with
their advisers. The decision to hire or retain service providers remains a
fiduciary decision, and plan sponsors have an ongoing duty to monitor advisers.
Failure to do so could subject plan sponsors to potential ERISA fiduciary
Since rollover or distribution recommendations will be covered by the new
conflict of interest rule, some service providers may be less willing to assist
participants with the decision of whether or not to roll over their plan assets
to an IRA in order to avoid being held to the standard of fiduciary in giving
advice on such a decision. This is a significant change to the rules and may
result in participants electing to leave assets in the plan following
Plan sponsors should also take a close look at the investment education that
is provided to plan participants and beneficiaries to ensure that the investment
education qualifies as education rather than advice under the new rules.
Pending lawsuits could delay or overturn the regulation. Also a new
administration in the White House may result in the rules possibly getting
delayed or killed. Even the DOL may take action…the DOL acknowledges that
additional "sub-regulatory guidance will likely be necessary." Time will tell.
This newsletter is intended to provide general
information on matters of interest in the area of qualified retirement plans and
is distributed with the understanding that the publisher and distributor are not
rendering legal, tax or other professional advice. Readers should not act or
rely on any information in this newsletter without first seeking the advice of
an independent tax advisor such as an attorney or CPA.