On April 8, 2016, the United States Department of Labor (Department) published its long-awaited final regulations (the Rule) redefining who is a “fiduciary” of an employee benefit plan under the Employee Retirement Income Security Act of 1974 (ERISA) as a result of giving investment advice to a plan or its participants and beneficiaries.  The Rule also applies to the definition of a “fiduciary” for purposes of individual retirement accounts (IRA) under the Internal Revenue Code of 1986 (IRC).  Together with the Rule, the Department has finalized exemptions to the prohibited transaction provisions of ERISA and the IRC, including the Best Interest Contract Exemption (BIC Exemption), which permit fiduciaries to receive fees in connection with certain transactions.

This Rule is the first amendment to the definition of a “fiduciary” under ERISA in forty years, and expands the definition of “fiduciary” to advisers of qualified retirement plans and IRAs.  On April 10, 2015, the Department had published a proposed rule which generated substantial comments from industry and other groups.  In the preamble to the Rule, the Department goes to great lengths to stress that it has considered these comments and addressed many of them in the Rule and related exemptions.  This Quick Study provides a brief overview of the Rule.

The Department proposed the Rule to ensure that Retirement Investors receive advice that is in their best interest.  The Department was particularly concerned with the impact that conflicted advice has on the retirement assets of retail investors.  In seeking to reach this goal, the Rule imposes fiduciary obligations upon advisers who recommend investments to qualified plans, plan participants and beneficiaries, plan fiduciaries, and IRAs and IRA fiduciaries.  The Rule deems an Adviser to have given “investment advice” under ERISA if: 

  1. it represents that it is acting as a fiduciary within the meaning of ERISA or the IRC, 
  2. it renders advice pursuant to a written or verbal agreement where the advice is based on the particular circumstances of the recipient, or
  3. it makes a recommendation as to any particular investment, investment strategy, or similar activity, and such recommendation is directed to a specific advice recipient. 

In the Rule, the Department provides additional guidance on what does and does not  constitute “investment advice.” For instance, the Rule makes it clear that an Adviser or Financial Institution does not act as a fiduciary by recommending that a plan participant or beneficiary, or IRA beneficial owner, hire the Adviser (the Financial Institution or any of its affiliates) as an investment manager.  However, recommending an unaffiliated adviser would be deemed investment advice.  The Rule has also made clear that an Adviser’s investment recommendations to rollover assets from a qualified retirement plan or IRA will be deemed fiduciary in nature.  The Rule does not extend fiduciary coverage to appraisals, fairness opinions, or similar statements and valuations, and the Department reserved this provision for future rulemaking.

The Rule expanded the exceptions from fiduciary status for specific conduct that were provided in the proposed Rule.  Notably, the Department recognized that the proposed exceptions were vague and would leave substantial activity that is not fiduciary in nature to be classified as “investment advice”.  The Rule makes it clear that “general communications”, which include public speeches, general marketing material, and research reports, among other items, which are intended for distribution to the general public, are not recommendations and would not be considered investment advice.  Likewise, the Rule expanded the exception granted to investment education.  This exception now includes a greater scope of topics that can be discussed when delivering investment education.  Additionally, the Rule allows asset allocation models and interactive investment materials with respect to a retirement plan (but not an IRA) to identify specific investment alternatives if certain conditions are met.

The Rule makes it clear that in order to be considered “investment advice," the Adviser must make a recommendation with respect to the management of securities or other “investment property." The definition of “investment property” now clearly carves out “health insurance policies, disability insurance policies, term life insurance policies, and other property to the extent the polices or property do not contain an investment component.”  Importantly, this clarifies the Rule is focused on whether the property itself involves some investment component and not whether the property could be part of an overall financial and investment portfolio.

Commentators expressed concern about their ability to comply with the Rule within the eight-month transition period contained in the proposed Rule. To give firms adequate time to comply with the Rule, the Rule adopts a “phased-in” approach.  The broader definition of “fiduciary” will be effective on April 10, 2017, but several aspects and requirements, including certain provisions of the BIC exemption, do not become effective until January 1, 2018.  This extended period will be very helpful as firms begin to develop and implement structures to comply with the requirements of the new Rule.