Over the past several months, the U.S. Department of Labor and U.S. Supreme Court have focused their attention on ERISA's fiduciary rules.  In a prior alert (found here), we explained the Supreme Court's decision in Tibble v. Edison International and its potential impact on plan fiduciaries' duties to continually monitor investment funds and to document their analyses.  This client alert focuses on the DOL's proposed rules addressing when persons providing investment advice will have ERISA fiduciary status and highlights questions that plan sponsors may wish to consider now.

More guidance is expected to come later this year or early next year in the form of final regulations, so plan sponsors should stay tuned for additional alerts. 

Who is a Fiduciary Under the Rules? Under the proposed rules, “fiduciary” includes any person who provides “investment advice”, which generally includes investment recommendations, management recommendations, appraisals of investments, and recommendations of a person who is going to receive a fee or other compensation for providing “investment advice.” The advice must be given directly to an employee benefit plan, a qualified retirement trust, a qualified annuity plan, a plan fiduciary, a participant, a beneficiary, an IRA (may include HSA), or an IRA owner. The person must hold himself or herself out as a fiduciary or there must be an understanding (written or verbal) that the advice is individualized or specifically directed to the recipient for consideration in making investment or management decisions.  The person must also receive a fee or other compensation (directly or indirectly) in exchange for the investment advice.

The types of professional advisors who may be covered by the rules include, but are not limited to, retirement plan advisors, broker-dealers, insurance sales agents, mutual fund advisors, investment advisors and managers, and third-party administrators or custodians providing on-line interactive investment tools.

Questions for Plan Sponsors to Consider:  Will any current “investment advisor” become an ERISA fiduciary if the proposed definition becomes final? Will he/she be taking steps to avoid this ERISA fiduciary status?  Do we need to consider corresponding changes to our investment committee charter or investment policies?

Are Any Persons Exempt From the Rules? In general, persons who offer the following services may be excluded from the rules (unless they hold themselves out as a fiduciary):

  • providing advice as a counterparty in an arm’s-length transaction to certain large plan fiduciaries with financial expertise,
  • recommending certain swap or security-based swap transactions as a counterparty to an employee benefit plan,
  • providing advice as an employee of the plan sponsor to a plan fiduciary, for which no compensation is paid beyond his or her normal compensation,
  • marketing or making available a platform of investment alternatives for a participant-directed plan,
  • identifying investment alternatives that meet certain objective criteria or providing objective financial data and comparisons, as part of marketing and making available a platform of investment alternatives,
  • providing certain appraisal, fairness opinion, or value statements to an ESOP, investment fund, or to an employee benefit plan, a qualified trust, a qualified annuity plan, a plan fiduciary, a participant, a beneficiary, an IRA or IRA owner for purposes of reporting and disclosure compliance,
  • furnishing or making available certain “investment education” information, or
  • executing certain “securities transactions” on behalf of an employee benefit plan or IRA as a broker, dealer, or bank.

Questions for Plan Sponsors to Consider:  Do any “investment advisors” provide the types of services covered by one of the exempt categories?

Are Any Transactions Exempt From the Rules? There are two proposed prohibited transaction exemptions that allow fiduciaries who provide “investment advice” and receive a fee for such advice to engage in certain transactions without violating the prohibited transaction rules under ERISA and the Code.  The two proposed exemptions are:

  • “best interest” exemption, which generally permits fiduciaries who provide “investment advice” to engage in transactions that involve the purchase, sale or holding of certain investment products and are in the “best interest” of the investor (i.e., plan participants and beneficiaries, IRA owner and small plans (less than 100 participants)), and
  • “principal transactions” exemption, which generally permits fiduciaries who provide “investment advice” to engage in transactions that involve the sale or purchase of certain debt securities with plans, participants and beneficiaries, and IRAs.

In order to be protected by these exemptions, the fiduciaries would have to satisfy a number of requirements, some of which include entering into a written contract with specific terms (e.g., acknowledgment of ERISA fiduciary status), complying with impartial conduct standards, adopting policies that mitigate the impact of material conflicts of interest, and disclosing certain information such as conflicts of interest, costs and pricing. Also, the U.S. Department of Labor proposes to amend several existing class exemptions to incorporate “impartial conduct standards.”  The exemptions proposed to be amended are PTEs 75-1, 77-4, 80-83, 83-1, 84-24 and 86-128.

Questions for Plan Sponsors to Consider: Will current “investment advisor” arrangements need to be modified in order to comply with an exemption? Do we need to consider corresponding changes to our investment committee charter or investment policies to require that we obtain proof of these exemptions when retaining certain fiduciaries, or to require that fiduciaries satisfy these exemptions?

When Will the Rule Be Effective? The comment period is open until July 21, 2015 and a public hearing is being held from August 10 through August 12 (and August 13, if necessary) to hear issues about the proposed rules. The U.S. Department of Labor’s goal is to finalize the proposed rules before the end of January 2017. 

Whether or not the proposed rules will have a significant impact on plan sponsors depends on many factors, such as whether the proposed rules will become final rules, the plan sponsor’s current relationship with its “investment advisors,” and the plan's need for continued services from its “investment advisors.”