On April 6, 2016, the Department of Labor (“DOL”) issued final regulations providing the long-awaited update to the definition of fiduciary under the Employee Retirement Income Security Act (“ERISA”). Brokers, investment advisors and other financial consultants are greatly impacted by the new rule, but the impact to employers that sponsor retirement plans appears to be relatively minor. The new rule applies to transactions which occur on and after April 10, 2017.
As explained by the administration when the final rule was released, “[u]nder the rule, any individual receiving compensation for making investment recommendations that are individualized or specifically directed to a particular plan sponsor running a retirement plan (e.g., an employer with a retirement plan), plan participant, or IRA owner for consideration in making a retirement investment decision is a fiduciary.” An individual who is a fiduciary under the rule must provide impartial advice in their client’s best interest and cannot accept any payments which create a conflict of interest unless an exemption applies. Therefore, individuals making these recommendations may not receive certain types of common fees (including broker commissions, insurance commissions, 12b-1 fees, and revenue sharing fees) unless an exemption is available.
Investment Advisor Fees - If the advisor to your retirement plan receives a “level fee”, such as a fixed dollar amount per year or a fixed asset-based fee, that does not change based on the investments made under the plan, the advisor must only acknowledge that he or she is a fiduciary and adhere to certain impartial conduct standards. However, if the advisor intends to collect the other types of common fees (such as 12b-1 fees or revenue sharing), he or she must comply with the more onerous “best interest contract” exemption rules.
If your plan has more than $50 million in assets and the advisor does not acknowledge that it is a fiduciary, the advisor may fall into a different exemption from the new definition of fiduciary. Consult with the advisor to your plan to understand his or her position regarding his or her status as a fiduciary, and ensure that the plan’s fiduciaries (other than the advisor) document and confirm this position. The fiduciaries for your plan should understand (1) whether advisors will be fiduciaries when the final rule is effective, and (2) whether the advisor must provide any additional disclosures to the fiduciaries or comply with any additional rules.
Education vs. Advice - The new rule also clarifies the difference between investment education and investment advice. Recordkeepers will likely be reviewing and modifying communications and website interactions, and employers should monitor these developments to ensure that plan fiduciaries are comfortable with interpretations and actions taken by the plan recordkeeper. Since providing “recommendations” in connection with rollovers is now a fiduciary action, particular attention should be paid to recordkeeper and advisor interactions with participants regarding rollover decisions.