Many large non-profit organizations, such as educational institutions and health care organizations, are accustomed to (and really like) having an “on-site advisor” available to meet one-on-one with retirement plan participants. In light of the new fiduciary rule, this article explores how to maintain and improve on-site advisor services after the rule goes into effect in 2017. The new fiduciary rule is a sea of change for investment professionals. While employers can continue to have on-site advisors, the new rule will impact how on-site advisors provide services to ERISA retirement plan participants.
Employees at hospitals, colleges and other non-profit organizations turn to their on-site advisors for retirement plan guidance. An on-site advisor is someone employees often know on a first-name basis and who may have developed a positive long-term relationship with the employer. Employees meet with an on-site advisor for answers to retirement plan questions, to discuss personal financial situations and significant life events, and to checkup on their retirement plan account investments and objectives.
The on-site advisor provides guidance to the participants relating to their retirement plan investments, as well as distributions from the plan. Providing general education about the plan provisions is excluded from the scope of fiduciary status. Providing guidance on plan investments and distributions, however, may trigger fiduciary status under the new fiduciary rules.
In April 2016, after years of waiting, the Department of Labor issued the final rule for the definition of fiduciary. This is the first revision to ERISA’s fiduciary definition since a 1975 DOL regulation.
As in the past, a person can be treated as a fiduciary of an employee benefit plan through management or administration of the plan:
• Management – by having discretionary authority or discretionary control regarding management of the plan or exercising any authority or control over the management or disposition of the plan assets; or
• Administration – by having discretionary authority or discretionary responsibility in the administration of the plan.
These two paths to being a fiduciary have not changed. The change relates to the wider array of advice relationships that have developed particularly with self-directed individual account plans and IRAs since 1975. Under the new rule, beginning April 10, 2017, a person can be treated as a fiduciary, through investment advice:
• Investment Advice – by providing investment advice or recommendations for a fee or other compensation with respect to assets of a plan or IRA.
The final rule broadens who is a fiduciary with respect to investment advice. Thus, investment professionals who were not fiduciaries under the 1975 regulation will be treated as fiduciaries under the new definition.
How Does This Impact On-Site Advisors?
On-site advisors will have to determine if they are fiduciaries under the new rule.
• Do they make recommendations?
• Are their recommendations directed to a specific plan participant?
• How are they compensated?
Investment education, plan information and retirement education are not subject to fiduciary standards as investment advice. This means financial literacy tools and educational communications that are valuable resources for plan participants can be provided without being treated as investment advice under the rule.
If an on-site advisor is providing investment education and plan information only, and does not cross the line to recommending a specific investment or investment strategy, the advisor can remain a non-fiduciary. In many cases, on-site advisors are going beyond general information and, as their title indicates, are advising on specific investment choices.
The rule change stems from a concern about conflicts of interest and self-dealing related to the vast movement since 1975 away from defined benefit plans to individually-directed plans and accounts. On-site advisors, working with a specific financial institution, often steer employees toward proprietary funds that pay commissions, making it difficult for the advisor to act in the employee’s best interest. Similar conflicts arise with distributions where advisors are better compensated when directing IRA rollovers to proprietary funds and products.
Under the new rule, advisors can continue to receive variable compensation such as commissions that could otherwise be prohibited, as long as they adhere to basic fiduciary standards aimed at ensuring that their advice is in the best interest of their participants, and they take certain steps to minimize the impact of conflicts of interest. In general, this involves the financial institution:
• acknowledging its fiduciary status, in writing;
• providing advice that is in the participant’s best interest;
• charging no more than reasonable compensation;
• avoiding misleading statements; and
• giving participants the information that they need to access fees, costs and material conflicts of interest.
Next Steps for Plan Sponsors
Plan sponsors have a duty to monitor their service providers, including their on-site advisors. With the upcoming change in the fiduciary definition, it is a good time to confirm whether or not service providers are fiduciaries and ask if providers’ services or fees will change to comply with the new rule. Lastly, plans sponsors should carefully review new service agreements as vendors make changes to conform to the final rule.