Last week, the Department of Labor ("DOL") published final regulations (the "Final Rules") addressing who is a fiduciary of an employee benefit plan or IRA by virtue of rendering investment advice to the plan, its participants, and/or the IRA owner. The potential impact of the Final Rules on investment advisers and IRA owners has already received widespread media attention. In this client alert, we discuss select aspects of the Final Rules from the perspective of employers who sponsor retirement plans, as well as offer suggestions on what to do now.
- Which Employers and Which Retirement Plans are Covered by the Final Rules?
As a legal matter, the Final Rules apply to the provision of investment advice to retirement plans which are subject to Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") and/or to section 4975 of the Internal Revenue Code (the "Code") (collectively "Covered Plans"). In practical terms, this means that both the status of the employer and the type of plan are relevant when determining the application of the Final Rules.
- Private, for-profit employers. The Final Rules apply to defined benefit and defined contribution plans qualified under Code section 401(a), such as 401(k) plans. They do not apply to nonqualified deferred compensation plans under Code sections 409A and/or 457A or to unfunded plans maintained for a select group of management or highly compensated employees ("top hat" plans).
- Private, tax-exempt employers other than churches. The Final Rules apply to qualified plans as described above. They also apply to 403(b) plans unless the 403(b) plan satisfies the DOL safe harbor for exemption from Title I of ERISA. The Final Rules do not apply to nonqualified plans or to top hat plans, including plans under Code sections 457(b) and 457(f).
- Churches. The Final Rules do not apply to plans maintained by churches, regardless of plan type, unless the church has made an affirmative election that the plan is to be covered by ERISA.
- Governmental Entities. In general, the Final Rules do not apply to plans maintained by governmental entities, regardless of plan type.
- Do the Final Rules Distinguish Between Types of Covered Plans?
Broadly speaking, the Final Rules apply to the provision of investment advice to Covered Plans regardless of plan type. This is a key difference from the proposed regulations in the case of the Best Interest Contract Exemption which permits advisers and financial institutions to make investment recommendations and receive otherwise prohibited compensation in exchange for their adherence to enforceable standards of fiduciary conduct and fair dealing. The Final Rules expand the exemption to cover sponsors of small and micro participant-directed 401(k) and 403(b) plans. This is intended to protect access to investment advice for plan sponsors who manage assets of less than $50 million.
For transactions between advisers and plan sponsors that manage assets of at least $50 million, the Final Rules contain a carve-out subject to specific information and other requirements. The stated assumption is that the parties involved have a high degree of financial sophistication and often engage in arm's length transactions in which neither party has an expectation of reliance on the counterparty's recommendations. The carve-out does not preclude advisers from representing or acknowledging contractually that they are acting as a fiduciary within the meaning of ERISA or the Code.
- What Can Employers Do Now?
The general applicability date of the Final Rules is April 10, 2017, with a transition period through January 1, 2018 for certain provisions. While many of the compliance requirements will fall on advisers, employers that sponsor Covered Plans can take following steps now:
- Determine which retirement plans are Covered Plans (including plans that have been frozen but not terminated).
- Inventory and ascertain the fiduciary status of existing advisory relationships.
- Prepare to respond to employee inquiries regarding the impact of the Final Rules on their retirement plan investments.
This client alert has discussed select aspects of the application of the Final Rules to employers and employer-sponsored retirement plans.