DOL Reproposes ERISA Fiduciary Investment Advice Regulations

Most everyone in the employee benefits industry agrees: protecting retirement plans and their participants from investment advisors who may focus more on their own financial interests than those of plan participants is a good idea. However, whether the Department of Labor’s (DOL’s) reproposed ERISA fiduciary investment advice regulations, if adopted as proposed, will accomplish this remains uncertain.

A Little Background

The DOL first issued proposed regulations in 2010 with the intent to broaden the scope of advisors included in the status of a fiduciary. The objective was to protect plan sponsors and participants from abuses by some advisors. The proposals were met with a barrage of industry criticism and were eventually dropped — until now. The 2015 reproposed regulations, although very similar to the original proposed regulations, shift their emphasis to IRAs.

Currently, the DOL is scheduled to hold public hearings on the proposals in August. If all goes according to the original schedule, the rules should be finalized in the fall and then take effect eight months later. However, because of anticipated criticism that the regulations’ complexity and broad reach prevent compliance within this time span, the timetable may be extended.

There will no doubt be criticism leveled at the reproposed regulations. However, because the reproposed regulations reflect feedback on the original proposals, substantive changes are unlikely to be made to the final regulations.

Proposed Fiduciary Definition

Currently, a five-part test determines fiduciary status for people providing investment advice, with a broad presumption of fiduciary status. The reproposed rules replace this presumption with new “principles-based” prohibited transaction exemptions, and change several existing prohibited transaction class exemptions.

Under the reproposed regulations, a person is an investment advisor fiduciary if, for a fee, he or she provides investment recommendations directly to a:

  • Plan,
  • Plan fiduciary, plan participant or beneficiary, or
  • IRA or IRA owner to purchase or sell investments, take a distribution, execute a rollover, or retain a particular investment manager.

A recommendation is a “communication that, based on its content, context and presentation, would reasonably be viewed as a suggestion that the recipient engage in or refrain from a particular course of action.”

Fiduciary “Carve-outs”

The DOL provides exemptions to the above broad fiduciary rule through “carve-outs.” For example, a person won’t be considered a fiduciary for providing the following investment advice:

  • Statements or recommendations made to a “large plan investor with financial expertise” by counterparties involved in an arm’s-length transaction, or a swap or security-based swap that’s regulated under the Securities Exchange Act, or the Commodity Exchange Act,
  • Statements or recommendations provided to an ERISA plan fiduciary, by an employee of the plan sponsor, if the employee receives no fee beyond his or her normal compensation,
  • Marketing, or making available, a platform of investment alternatives to be selected by a plan fiduciary for an ERISA participant-directed individual account plan, and
  • The identification of investment alternatives that meet objective criteria specified by an ERISA plan fiduciary or the provision of objective financial data to such fiduciary.

In addition, the rules carve out a fiduciary status exemption for providing information and materials that constitute investment or retirement education. However, the revised rule prohibits distribution of materials that discuss specific investment products, investment managers, or the value of particular securities or property. If the education includes asset allocation models, those models must be generic and cannot identify specific investments available to plan participants.

Concerns for Sponsors

Although the DOL’s reproposed regulations will govern the behavior of investment advisors and financial institutions that provide services to retirement plans and their participants, the rules affect plan sponsors as well, and not always positively. For example, critics argue that the rules will constrain the availability of investment services, particularly for smaller plans, by pushing their regulatory compliance costs unsustainably high.

The DOL has responded to this criticism by stating that the current system in which firms can benefit from hidden fees found in the fine print of retirement investments with high costs and low returns isn’t fair.

SEC Gets in the Mix

Meanwhile, the Securities and Exchange Commission is planning to propose a fiduciary standard for brokers who recommend investments, whether to individuals or retirement plan sponsors. It’s unclear how those proposals will mesh with the DOL’s proposed regulations. Either way, 2015 is shaping up to be a big year for investment-advice fiduciaries.

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