As has been widely reported, the U.S. Department of Labor recently published a regulation greatly expanding the circumstances in which individuals and entities will be deemed to provide fiduciary investment advice for purposes of the Employee Retirement Income Security Act of 1974, as amended (ERISA). Because the ERISA fiduciary and conflict of interest standards are famously "the highest known to the law,"1 this development has triggered widespread reconsideration of communications, services, practices and relationships common in the retirement space. While the principal burden of the new rule falls

"The principal burden of the new rule falls primarily on those marketing investment products."

on marketers of investment products and service providers, sponsors of retirement plans and certain other benefit arrangements (with investment components like health savings accounts) also have a to-do list, which must be completed before April 10, 2017, applicability date for most of the new rules.

Confirm the Non-Fiduciary Status of Employees.

The final regulation helpfully resolves issues presented under the April 2015 proposal with respect to the status of individual employees whose duties include support of the company retirement plan. Under the final rule, the current assignment of fiduciary responsibilities conventionally in place (the company is the plan administrator, a specified committee is the "named fiduciary" responsible for the investment matters, and employees who support those functions are not fiduciaries) largely can be preserved, subject to certain conditions, which include:

  • In-house treasury or investment staff who provide investment "recommendations" (which, under the final regulation, is the core concept for identifying investment advice fiduciaries) to the plan investment committee may not receive any compensation for their advice beyond their normal compensation from the employer.
  • For a human resources employee who provides advice to plan participants about investments or distributions, providing investment advice or recommendations must not be part of the employee's job description, the employee must not be licensed or registered under insurance or securities laws (and the advice must not require such a license or registration), and the employee must not receive any direct or indirect fee or other compensation for the advice other than normal compensation from the employer.

TO DO #1

To the extent that current employment arrangements for employees providing investment advice do not meet the prescribed conditions, the arrangements generally should be conformed before the applicability date (April 10, 2017).

Review "Investment Education" and Distribution Communications.

Since 1996, the Labor Department has recognized that a range of plan information materials, general financial and retirement information, asset allocation models and interactive investment tools can be provided to plan participants without becoming "investment advice."

The final regulation retains that concept with some modifications, e.g., that general decumulation education is not investment advice. At the same time, the final regulation converts many communications about distributions and rollovers into fiduciary advice, even if no specific investment is recommended. For example:

  • Materials that describe distribution options, and generally explain the corresponding advantages, disadvantages and risks of each, are investment education.
  • Information, including discussions with call center representatives, regarding the appropriateness of a specific distribution option for a specific participant may constitute investment advice.

Also, the rules under which asset allocation models in ERISA plans are treated as education rather than advice were also tightened. While service providers may continue to provide asset allocation models and interactive investment tools, in-house plan fiduciaries have an ongoing duty to monitor service providers to verify that the investment education materials provided to participants are unbiased.

TO DO #2

Before the applicability date, investment education materials, rollover and distribution forms, call center scripts, human resources procedures and related processes should be refined to reflect the modified rules.

TO DO #3

Plan recordkeepers and other service providers may become more circumspect in their interactions with participants about investment and distribution matters, in order to avoid fiduciary concerns. Plan sponsors should coordinate with their service providers, identify any new gaps in the information and services available for participants, and consider ways to close any such gap.

TO DO #4

Develop a procedure, or modify existing procedures, for ongoing monitoring of plan service providers and the information they are providing to participants.

Validate Compliance in Vendor Relationships and Review New Disclosures and Agreements.

To the extent that financial services providers to a plan are already treated as fiduciaries, they will retain that status under the final rule. The principal import of the rule is to cause a variety of other investment product and service providers to become fiduciaries, including in sales settings. Product or service providers providing investment recommendations may be fiduciaries under the final regulation unless an exception applies.

The exceptions include:

  • A person communicating with independent in-house fiduciaries will not be deemed a fiduciary if the inhouse plan fiduciaries have responsibility for managing more than $50 million in assets, subject to limited documentation requirements.
  • Firms involved in swap transactions generally will not be treated as fiduciaries by reason of giving advice to ERISA plans, subject to substantive documentation requirements.

In-house plan fiduciaries are potentially exposed to co-fiduciary liability based upon the actions of investment product and plan service providers that may now qualify as plan fiduciaries under the final regulation.

Providers newly treated as fiduciaries are in the process of considering changes to their business models and practices to meet the new regulations. These providers may be adopting applicable compliance solutions available in connection with the final regulation, such as the Best Interest Contract Exemption, which entails new documentation at the formation of the relationship as well as website and transactional disclosures. And newly minted fiduciaries that were not previously subject to the section 408(b)(2) disclosure regime may be providing those disclosures for the first time.

In addition, service providers that do not intend to provide investment advice, but in the past may have assisted plan sponsors by providing informal guidance such as industry experience or sample plan investment lineups, may no longer offer this type of insight to avoid the risk of being treated as a fiduciary to the plan. Plan sponsors that found this type of input helpful for understanding typical investment structures for plans of their size may need to retain an investment adviser. It may also be helpful to rethink the request for proposal processes for retirement products and services to avoid unintended complications under the new rules.

TO DO #5

Contact existing providers to determine which will become fiduciaries under the final rule and verify that they will have an acceptable exemption or other compliance solution to continue providing their services. (Many providers will not be in a position to discuss these issues definitively until later in the year.)

TO DO #6

For existing service providers which perform fiduciary functions, compliance solutions which they relied on in the past may be changing in conjunction with the final rule. The terms of relationships with all these providers, including representations and indemnities, may need to be updated or renegotiated to reflect the new rules.

TO DO #7

Adapt existing plan practices and procedures to accept, and be prepared to receive and evaluate, the additional documentation and disclosures expected from product and service providers.

The final regulation is voluminous and detailed, resulting in ongoing changes and, in some cases, unintended consequences in the marketplace. Because some of these to-do list items will require strategic thinking and discussions with service providers, plan sponsors are encouraged to begin working through these items well in advance of the April 10, 2017, effective date.

"Adapt existing plan practices and procedures to accept, and be prepared to receive and evaluate, the additional documentation and disclosures expected from product and service providers."