On April 6, the Department of Labor released its long awaited final fiduciary rule, which expands the reach of ERISA’s definition of “fiduciary” by redefining when a person is treated as rendering investment advice. Under the final rule, a wider array of relationships will give rise to fiduciary status for those who work with retirement plans.
Since the final rule was published, much of the discussion has focused on the effect it will have on investment advisors, leaving employers and plan sponsors left to wonder how the new rule will affect their plans.
Here are some important take away points from the final rule for plan sponsors:
- Current Investment Advisor. Plan sponsors that currently work with an investment advisor who acts as a fiduciary will be impacted less by the new rule than those who currently work with non-fiduciary advisors. If you are unsure whether the advisor is acting as a fiduciary, now is the time to clarify the relationship and determine whether the advisor is (or will become) a fiduciary to the plan. Going forward, nearly all persons a plan sponsor would rely on for guidance on investments will be fiduciaries to the plan and will be required to meet the new rules.
- Investment Education Materials. As in the past, sponsors and service providers may provide investment education without crossing the line into providing investment advice (and thereby becoming a fiduciary). However, the final rule does not provide a per se exemption for investment education, and educational services may cross the line into investment advice unless certain requirements are met, such as including particular disclosures for asset allocation models and interactive investment materials. For that reason, now would be a good time for sponsors to review the materials being provided to plan participants and beneficiaries as part of an investment education program to make sure the materials are compliant with the final rule.
- Rollovers. Given that recommendations with respect to rollovers, distributions or transfers from an employer’s plan will now place investment advisors in a fiduciary role, sponsors may notice that fewer terminated vested participants are rolling their money out of the plan. Sponsors should monitor any changes and make adjustments (such as reevaluating the selection of “to” versus “through” target date funds) as necessary.
- Employees of the Plan Sponsor. To be investment advice, recommendations must be provided in connection with a fee or other compensation. Because employees receive compensation from the plan sponsor in the ordinary course of employment, practitioners questioned whether an employee who provides an investment recommendation to the plan sponsor or another participant would be a fiduciary under the new rule. Thankfully, the final rule clarified that employees will generally not be an investment advice fiduciary, even if that investment education crosses the line into investment advice, unless the employee receives compensation for providing that advice beyond the employee’s normal compensation.
- Healthcare Savings Accounts and Welfare Plans. The provisions of the final rule are applicable to HSAs but not to welfare plans (such as health, disability and term life insurance policies) that do not have an investment component.
- Seller’s Carve-Out. Recommendations provided to plan sponsors and other independent fiduciaries managing more than $50 million in assets are not investment advice covered by the final rule as long as certain conditions are met.
- Best Interest Contract Exemption. In connection with redefining the definition of “fiduciary,” the DOL granted new exemptions to the prohibited transaction rules – the Best Interest Contract Exemption (BICE) is the most notable. The BICE allows investment firms and advisors to receive forms of compensation that would otherwise be prohibited under ERISA and the Internal Revenue Code provided they take several protective steps to mitigate the impact of any conflicts of interest, such as acknowledging their fiduciary status, implementing policies and procedures designed to prevent conflict of interest violations, and disclosing information about their conflicts of interests and the cost of their advice. For advice provided to ERISA plans (including to participants, beneficiaries, and fiduciaries) a separate written contract is not required.
The BICE requirements are streamlined for financial institutions and advisors who only receive a level fee in connection with advisory or investment management services. As a result, plan sponsors may see advisors move to level fee arrangements. These arrangements should be reviewed to ensure that they comply with the BICE rules.
Applicability Date. The expanded definition of fiduciary will go into effect April 10, 2017, and the requirements of the BICE (as well as the Principal Transaction Exemption, which is not covered here) will be phased in over a period between April 10, 2017 and December 31, 2017.