Get Your Fiduciary House in Order

DOL’s Newest Regulations Require Plan Sponsor Action

The majority of the U.S. Department of Labor’s (“DOL”) complex regulations mandating fiduciary status for individuals dealing with retirement investment decision-making involve investment advisors. The regulations, which are scheduled to take effect on April 10, 2017, expand the definition of fiduciary status and require plan sponsors (who are the fiduciary) to take certain steps.

A Primer

Investment committee members or any other individuals that have control over plan management or plan investments already act in a fiduciary capacity and the regulations don’t remove that status for those who already serve in that capacity.

However, under the new rules, for an employee who provides advice to plan participants:

  • The employee’s job responsibilities cannot include providing investment advice or investment recommendations,
  • The employee may not be registered or licensed under federal or state securities or insurance laws,
  • The employee’s advice may not require registration or licensing under such laws, and
  • The employee may not receive any direct or indirect fee or other compensation in connection with the advice beyond the employee’s normal compensation for work performed for the employer.

Now’s the time for you to ensure that your in-house treasury, human resources and other investment staff can qualify for these exceptions.

Service Provider Questions

The new regulations do not require any actions from those service providers who are already acting in a fiduciary capacity, however, those who look to adjust to the new regulations need to provide a clear understanding of the changes that they make.

However, some service providers may, without changes on their part, fall into the fiduciary category. This status has to be expressed in writing. It’s up to the service providers to determine whether they’ll either acknowledge their fiduciary status, or change their role to avoid it.

The rule doesn’t impose fiduciary obligations on advisors if the advisor knows or reasonably believes that the fiduciary is a licensed and regulated provider of financial services or manages plans with $50 million or more in assets. Advisors seeking to rely on this provision may ask for a written representation that the employer is exercising independent judgment and is capable of evaluating investment risks. Further, the advisor must inform the employer of the existence of any financial interest in the transaction and the advisor cannot receive a direct fee in association with the advice being provided.

BICE Agreements

One way the service providers can help avoid fiduciary status is to change their business model and enter into an agreement with you known as a best interest contract exemption (“BICE”). This signed agreement helps change the nature of the business relationship by spelling out the steps on how the service provider intends to comply with the fiduciary rules. This agreement will help assess whether the documentation that has been provided, or will be provided, is adequately clear and complete. Then decide whether any changes in their role leave gaps in the services you need, particularly with respect to advice on investment solutions.

Rollover Discussions

The regulations pull certain communications about IRA rollover options into the definition of advice — whether or not the plan sponsor urges participants to roll over plan funds into particular IRA investments. The major  concern of the DOL is that advisors who manage retirees’ IRAs would rather produce more revenue and  skew their communications about rollovers in favor of that option.

It would be OK if the communications merely explain the pros and cons of rolling over to an IRA, but if materials or suggestions by call center representatives suggest that one option might be more suitable than another, this could constitute advice, conferring fiduciary status.

In order to help prevent this, the advisor should establish a routine procedure to monitor communication materials supplied to participants to ensure that they stay on the education side of the education-advice boundary.

Complex Decisions

Due to the complexity of the DOL regulations, it might take months or even years for their practical application to be fully understood. In order to avoid fiduciary duty, you should review the actions and discuss the regulations with you benefit specialist.

Sidebar: Education or Advice?

The recent U.S. Department of Labor’s (“DOL”) fiduciary regulations require taking a close look at the distinction between investment education, and investment recommendations or advice.  In order to comply with the DOL’s fiduciary regulations, you need to make sure that the educational materials provided to the individual doesn’t cross the line to becoming advice.

The DOL guidance from a decade ago, in Interpretive Bulletin 96-1, still is valid today. The following will be deemed educational:  plan information, general financial and investment information, asset allocation models, and interactive investment materials.

The “facts and circumstances of a particular case” will ultimately determine the assessment of the investment advice given. The new DOL fiduciary regulations hold plan sponsors responsible for monitoring education materials to ensure they don’t evolve and stray across the line between education and advice. Be sure to review all of your educational materials with your benefits specialist.

© 2017

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