DOL Fiduciary Rule Rocks Plan Investment Advice Landscape

In April, the wait for the long-anticipated regulatory package was ended. The final version of the U.S. Department of Labor’s (“DOL’s”) fiduciary standards rule for advisors to retirement plans was issued. Over the course of the intervening months, the implications for plan sponsors have become clearer.

A Little Background

For nearly a decade, the DOL was concerned that retirement savers were being harmed by investment advisors who recommended investments that were more profitable for them rather than for their clients. With that in mind, the DOL issued regulations focusing on a more detailed definition of who is a “fiduciary.”

A transition rule gives plan sponsors and advisors time to adjust to the regulations’ detailed requirements. Even though the new rule overall took effect on June 7, key provisions are delayed. The revised definition of fiduciary advice becomes effective April 10, 2017, and the best interest contract exemption (“BICE”) isn’t fully phased-in until 2018.

Suitable vs. Best Interest

In the past, advisors were required to determine only that recommended investments were “suitable” for retirement investors — which is the same standard that applies to stockbroker suggestions for ordinary investors.  Fiduciaries are held to a higher standard— they must act solely in the best interest of plan participants, regardless of the financial implications for the advisor.

In 2010, the DOL proposed regulations that were widely criticized within the financial industry. Based on these proposed regulations, the vast majority of advisors would have been disqualified, if they failed to change their business models and become conflict-free plan fiduciaries. In 2015, the DOL issued a substantially modified proposed rule.

In April, after the incorporation of many industry-suggested improvements, the final rule was issued. A key feature of the 2015 proposal and final regulation is the creation of the BICE, which provides a path for advisors who would otherwise violate certain ERISA prohibited transaction rules to continue to advise retirement plans and IRA owners on investments.

Understanding BICE

The BICE “allows … registered investment advisors, broker-dealers and insurance companies, and their agents and representatives, that are ERISA or [tax] Code fiduciaries by reason of the provision of investment advice, to receive compensation that may otherwise give rise to prohibited transactions as a result of their advice to plan participants and beneficiaries.”

The regulation articulates principles advisors must adhere to. If your financial advisor doesn’t otherwise satisfy the traditional fiduciary requirement of having no conflicts of interest, he or she must:

  • Acknowledge the advisor’s and the financial institution’s fiduciary duty to the investor and provide prudent advice that’s in the customer’s best interest,
  • Disclose compensation and other fee information, and receive no more than reasonable compensation (“reasonable” being subjective),
  • Warrant that neither the advisor nor the financial institution will make any misleading statements about information pertinent to a transaction (including on such issues as fees, assets and conflicts of interest), and
  • Provide a list of the steps the advisor or financial institution will take to mitigate potential conflicts of interest.

Also, it was articulated that advisors must adopt policies and procedures reasonably designed to mitigate any harmful impact of conflicts of interest. This includes: (1) disclosing basic information about their conflicts of interest and the cost of their advice, and (2) this information must be supplied to “retirement investors”, but plan sponsors should be aware of all such communications.

Fiduciary advisors who charge a flat fee, known as “Level fee fiduciaries,” must provide plan participants and beneficiaries with a written statement of their fiduciary status, comply with the standards of impartial conduct, and document the specific reason or reasons for the recommendation of the level fee arrangement.

Time to Act

Since the final rule is complex, consult your benefits specialist about how the regulation affects your particular arrangements with investment advisors, as it pertains to providing investment advice.

Sidebar: Defining “Advice”

As stated in the U.S. Department of Labor’s (“DOL’s”) fiduciary standards rule, the definition of investment advice means, making a recommendation that someone take a specific action, or refrain from doing so, and being compensated directly or indirectly, for doing so.

According to the Plan Sponsor Council of America, the following are not subject to the revised fiduciary rules:

  • Providing an investment platform without regard to individualized investment needs,
  • Identifying investment options that satisfy the pre-established investment criteria of an independent plan fiduciary, and
  • Providing general investment communication that a reasonable person wouldn’t view as investment advice, such as newsletters, general marketing materials and general market data.

Human resources personnel that generally respond to employee questions aren’t considered fiduciaries under the new rules, since providing investment education, general financial investment and retirement information is not considered to be investment advice.

Keep in mind that these rules also apply to recommendations associated with Individual Retirement Accounts (“IRAs”).

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