After days of hearings and thousands of comments, the Department of Labor (DOL) has issued a significantly revised final rule (rule) outlining when a person will be deemed to be an ERISA fiduciary by reason of providing investment advice. This is arguably the most controversial and contested regulation the DOL has ever issued under ERISA.

The rule replaces 1975 guidance on when a person will be held to be providing investment advice to a plan or IRA and thus be considered an ERISA fiduciary. Under the 1975 guidance, investment advice had to be pursuant to a mutual agreement, provided on a regular basis and had to serve as a primary basis for the investment decision, among other conditions. In the DOL’s view, the 1975 guidance no longer provided appropriate protection to participants in 401(k) plans and to IRAs.

The rule principally affects broker-dealers, investment advisers and other third-party service providers, but plan sponsors need to be aware of several ways this rule affects plan administration. This bulletin highlights some key issues that will affect plan fiduciaries. We will continue to monitor developments that arise over the next year as everyone prepares to implement the rule.

Implementation Date for the Rule

Originally, the DOL intended to implement the rule eight months after the final rule was published. Many objected strenuously that such a date was aggressive and unlikely to be achievable. As a result, the DOL has now agreed that basic implementation would not be required until April 10, 2017. Full implementation is postponed even further to January 1, 2018.1

Who Will Be an Investment Advice Fiduciary under the Rule?

Most plan sponsors have appointed named fiduciaries (usually one or more committees) to manage the operation of their plans. Any such fiduciary (hereafter the plan fiduciary) needs to be aware that the rule may expand those who will be considered plan fiduciaries. Moreover, some advisers now may be “inadvertent” fiduciaries, i.e., persons who never intended or expected to assume fiduciary responsibilities but nevertheless now will have them.

The plan fiduciary will need to review plan operations to determine when investment advice is being provided under the rule and whether some service providers now fall into the “fiduciary” category.

Under the final rule, an investment advice fiduciary must meet two tests:

First, the person must be compensated directly or indirectly for providing to a plan, plan fiduciary, participant, beneficiary, IRA or IRA owner:

  • a recommendation as to the advisability of acquiring, holding, disposing or exchanging securities or other investment property, or a recommendation as to how securities or other investment property should be invested after the securities or other investment property are rolled over, transferred or distributed from the plan or IRA; or
  • a recommendation as to the management of securities or other investment property, including, among other things, recommendations on investment policies or strategies, portfolio composition, selection of other persons to provide investment advice or investment management services, selection of investment account arrangements (e.g., brokerage versus advisory) or recommendations with respect to rollovers, transfers or distributions from a plan or IRA, including whether, in what amount, in what form, and to what destination such a rollover, transfer or distribution should be made.

Second, the person must also directly or indirectly do the following:

  • represent or acknowledge acting as a fiduciary within the meaning of ERISA or the Internal Revenue Code; or
  • render the advice pursuant to a written or verbal agreement, arrangement or understanding that the advice is based on the particular investment needs of the advice recipient; or
  • direct the advice to a specific advice recipient or recipients regarding the advisability of a particular investment or management decision with respect to securities or other investment property of the plan or IRA.

What Will Not Be Considered Investment Advice

Importantly, the DOL recognized that the scope of the rule as set out above was extremely broad. The proposed rule had established a series of six “carve outs.” Many comments submitted to the DOL related to the scope of those carve outs.

As a result, the DOL made changes eliminating the term “carve outs” and in its place identifying actions that would not be considered “recommendations” and actions permitted even if they would be considered “recommendations.”

A. Activities That Will Not Be Considered a Recommendation

  1. Platform Providers. Making available a platform of investment alternatives from which a plan fiduciary may select.
  2. Selection and Monitoring Assistance. Identifying investment alternatives based on objective criteria, plan or employer size, current alternatives or objective financial data.
  3. General Communication. Making available communication that a reasonable person would not view as an investment recommendation.
  4. Investment Education. Furnishing or making available specified categories of investment-related information and materials.

B. Permitted Recommendations (unless provided by a person acknowledging fiduciary status)

  1. Transactions with Independent Fiduciaries with Financial Expertise. Under set conditions, providing advice to an independent plan or IRA fiduciary for an arm’s-length transaction.
  2. Swap and Security-Based Swap Transactions. Providing advice to an independent plan fiduciary regarding Swap transactions.
  3. Employee-Provided Advice. Advice provided by an employee of the plan sponsor or affiliate who receives no additional compensation.

What Should Plan Fiduciaries Do Now?

Plan fiduciaries should consider taking the following steps:

  • Undertake a Review of Plan Operations–Identify any investment advice fiduciaries, review their service agreement and implement any needed changes to the agreement.
  • Other Service Provider Agreements–Review the agreements of other plan service providers to determine if their agreements require any changes in light of the rule.
  • Plan Distribution and Rollover Process–Identify every service provider involved in the plan distribution and rollover process (a) to ensure they understand and will implement any changes required by the rule and (b) to determine what contacts they initiate with participants. 
  • Plan Education Materials–Review all communications to participants to ensure compliance with the revised education definition contained in the rule.

Almost certainly, the next 12 months will involve questions of interpretation and quite likely additional guidance from the DOL in the form of "Frequently Asked Questions and Answers." It will be important to keep focused on these developments as we approach the implementation date of April 10, 2017.