The Department of Labor’s (DOL’s) fiduciary standards rule for the financial services industry became applicable on June 9, 2017, with certain additional provisions scheduled to become applicable on January 1, 2018. The rule redefines and expands the scope of who is considered an investment advice fiduciary in certain transactions that involve ERISA plans, plan sponsors, plan participants, beneficiaries, and IRAs.
The DOL, however, has indicated that there will be a “transition period” between June 9 and January 1, 2018, in which it “will not pursue claims against fiduciaries who are working diligently and in good faith to comply with the fiduciary duty rule and exemptions, or treat those fiduciaries as being in violation of the fiduciary duty rule and exemptions.”
WHAT PLAN SPONSORS SHOULD KNOW ABOUT THE FIDUCIARY RULE
1. The rule expands the definition of investment advice and the parties who will be treated as fiduciaries for purposes of ERISA and the tax code.
The rule applies to employee benefit plans covered by ERISA that have an investment component. Therefore, it covers recommendations with respect to retirement plans, such as 401(k) and 403(b) plans, as well as recommendations for individuals who have or want to roll their retirement savings into an IRA. It also applies to employer-sponsored health savings options (e.g., Health Savings Accounts).
The rule includes a broad definition of investment advice, covering essentially any investment recommendation for a fee or other compensation, direct or indirect, that is:
- Acknowledged as fiduciary advice.
- Given pursuant to an understanding that the advice is based on the particular needs of the recipient.
- Directed to a specific recipient regarding the advisability of an investment or management decision.
- Note that a recommendation is generally any communication that could reasonably be viewed as a suggestion that the recipient engage in or refrain from taking a particular course of action.
Under the rule, therefore, it is important for plan sponsors to review periodically the capacity in which they have engaged their service providers for those services, and whether the provider is assuming fiduciary responsibility under the plan.2
2. The rule characterizes recommendations made to participants or beneficiaries regarding rollovers or distributions from an ERISA plan or IRA to another plan or IRA as investment advice.
It is important to note that providing general plan information, such as the distribution options available (including rollovers and annuitization) or general information about the advantages, disadvantages and risks of different forms of distribution, is considered educational information and not investment advice.
3. The rule also clarifies what does NOT constitute investment advice. Exceptions that are particularly relevant to plan sponsors include:
Investment education. The investment education exception is expanded to include educational programs and materials to assist participants in planning for retirement. Conversely, the rule somewhat narrows the DOL’s prior investment education guidance (Interpretive Bulletin 96-1) by imposing additional conditions on populating asset allocation models with specific investment alternatives available under the plan.
Employee communications. In general, advice given by employees of a plan sponsor (such as human resources employees) to a plan fiduciary (e.g., the plan’s investment committee) or another employee will not be treated as investment advice, provided that the person giving the advice is not compensated, directly or indirectly, for the advice. Additionally, the rule generally clarifies that employees of a plan sponsor who communicate information about the plan and distribution options to participants are generally not considered investment advice fiduciaries.
General communications. The rule states that general communications to plan fiduciaries, plan participants and beneficiaries, and IRA owners would not be viewed as investment advice. Examples cited include: general-circulation newsletters, commentary in publicly broadcasted talk shows, remarks at well-attended events, general market data, and general marketing materials.
Communications with independent plan fiduciaries. Investment advice under the final rule does not include advice provided to a plan fiduciary (independent of the advice provider) who or that is a bank, insurance carrier, registered investment adviser, a registered broker-dealer or an independent fiduciary that manages or controls at least $50 million in assets (including plan and nonplan assets), provided that, among other things, the advice provider receives no direct compensation in connection with the advice and satisfies various other conditions.
Platform providers. Marketing or making available a platform from which a plan fiduciary may select or monitor investment alternatives does not constitute investment advice, provided that the platform is offered without regard to the individualized needs of the plan and it is disclosed that the platform provider is not undertaking to provide impartial advice. The DOL also indicated that providing sample investment options in response to a Request for Proposal (RFP) or similar request from a plan is generally not considered investment advice.
Other exceptions include:
Welfare plan policies. Under the rule, recommendations pertaining to health insurance, disability insurance, life insurance and other policies or property are not considered investment advice unless they also include an investment component.
Appraisals and valuations. The DOL indicated that, for purposes of the final rule and in the absence of further guidance, providing appraisals and valuations will not be treated as investment advice.3
4. In the rule, the DOL adopted a new prohibited transaction exemption intended to establish a new best interest standard of conduct applicable to the IRA marketplace. It is important to note, however, that this new exemption, referred to as the “Best Interest Contract Exemption” or BIC Exemption, also has implications for advisers to certain ERISA plans that receive variable compensation or compensation from third parties in connection with their advice.
Of particular note, the BIC Exemption can apply to advice provided to plan fiduciaries that do not manage or control at least $50 million in assets and advice provided to participants and beneficiaries in connection with rollover or distribution recommendations.
The BIC Exemption sets forth a number of conditions that must be satisfied in order to qualify for relief from the prohibited transaction provisions of ERISA and the Internal Revenue Code, including:
- A contractual commitment to act in the best interest of the client. (For ERISA-covered plans and ERISA plan participants, the advice provider must acknowledge fiduciary status and commit to a best interest standard, but a contract is not required.)
- The establishment of policies and procedures intended to mitigate material conflicts.
- Point of sale and web-based disclosures regarding conflicts and compensation.
While the BIC Exemption became available on June 9, fewer conditions apply to those that rely upon the exemption until the transition period ends on January 1, 2018. During the transition period, financial institutions and advisers must comply with the “impartial conduct standards” that ensure that advisers adhere to fiduciary norms and basic standards of fair dealing. The standards specifically require advisers and financial institutions to:
- Give advice that is in the “best interest” of the retirement investor. This best interest standard has two chief components: prudence and loyalty.
- Under the prudence standard, the advice must meet a professional standard of care as specified in the text of the exemption.
- Under the loyalty standard, the advice must be based on the interests of the customer, rather than the competing financial interest of the adviser or firm.
- Charge no more than reasonable compensation.
- Make no misleading statements about investment transactions, compensation, and conflicts of interest.
To read more about the Rule and additional guidance provided by the DOL, visit the Department of Labor’s website (www.dol.gov/).
This document is meant to be a summary of important points regarding the Department of Labor’s fiduciary rule and Prudential Retirement’s implementation of it. It should not be relied on as plan or legal advice. Consult your legal counsel for plan-specific information.
Meredith Ciana is a Vice President of Product Management for Prudential Retirement’s Full Service Solutions group.