Last week, the Department of Labor (DOL) announced additional delays to major aspects of its fiduciary rule by proposing to extend certain transition period deadlines and applicability dates by 18 months. If finalized, full compliance with the rule’s chief prohibited transaction exemptions (PTEs) would not be required until July 1, 2019. The DOL said the 18-month extension will give it the time needed to consider possible changes and alternatives to the controversial exemptions, as well as to ease compliance burdens on regulated parties.

The announced proposal was issued shortly after the DOL released its second set of transition period guidance under the rule. In the form of three frequently-asked-questions (the FAQ), the FAQ contains an interim compliance standard for ERISA’s 408b-2 service provider fee disclosure regulation, as well as helpful clarification regarding investment education under the rule.

Background

The fiduciary rule significantly broadens the scope of those considered fiduciaries under ERISA on account of providing investment advice for a fee. In connection with the rule, the DOL issued new and amended PTEs, which would permit fiduciaries providing investment advice to continue to receive certain forms of compensation and engage in certain transactions without violating applicable prohibited transaction rules. See here for an earlier WorkCite article discussing the substance of the rule and related PTEs, new and amended.

After much uncertainty and delay, the fiduciary rule went into effect on June 9, 2017. Although the new definition of fiduciary investment advice now applies in its entirety, the DOL provided a transition period for most of the substantive requirements of the rule’s new PTEs – the BIC Exemption (PTE 2016-01) and the Principal Transactions Exemption (PTE 2016-02). It also delayed the applicability of amendments to an existing exemption related to certain insurance and annuity transactions (PTE 84-24). Specifically, it delayed until Jan. 1, 2018 the necessity to fully comply with all of the requirements of the BIC Exemption, the Principal Transactions Exemption and PTE 84-24 (as amended). Instead, during a transition period from June 9, 2017 through Jan. 1, 2018, a fiduciary need only satisfy the so-called “impartial conduct standards” to qualify for exemptive relief under those PTEs:

  • Give prudent advice in the investors’ best interest,
  • Charge no more than reasonable compensation, and
  • Avoid misleading statements.

Proposed 18-Month Delay

If finalized, the proposed amendments would extend by 18 months (i) the transition period deadlines for the BIC Exemption and Principal Transactions Exemption and (ii) the applicability of the amendments to PTE 84-24. Thus, full compliance with the rule’s chief PTEs would not be required until July 1, 2019. In the meantime, the DOL said it would continue to work on the regulatory analysis mandated by President Trump’s Feb. 3, 2017 memo and evaluate possible changes and alternatives to the exemptions. Comments on the proposed delay must be submitted by Sept. 15, 2017. The DOL specifically requested comments on the benefits of structuring the delay in one of several ways:

  • A delay set for a time certain, including the proposed 18-month delay,
  • A delay that ends on a specified date after the occurrence of a specific event (e.g., the end of the DOL’s examination mandated by the Trump memo or the issuance of proposed or final PTEs),
  • A tiered approach where the delay is set for the earlier or later of (i) a time certain and (ii) the end of a specified period after the occurrence of a specific event, or
  • A delay conditioned on the behavior of the entity seeking relief under the transition period.

Service Provider Fee Disclosures

Under rules finalized in 2012, ERISA plan service providers (“covered service providers”) are required to disclose fee and other information to the plan fiduciaries responsible for retaining those covered service providers (“responsible fiduciaries”). The disclosures are intended to ensure that responsible fiduciaries have the information needed to select and monitor covered service providers and to assess the reasonableness of service contracts and arrangements, including compensation and conflicts of interest.

If a covered service provider reasonably expects that such service provider, an affiliate or a subcontractor will provide services as a fiduciary, the service provider is obligated to disclose to the responsible fiduciary that services will be rendered in a fiduciary capacity. The FAQ provides guidance on such fee disclosures for service providers who may now be providing fiduciary investment advice as a result of the rule becoming applicable on June 9, 2017.

  • Service Providers Who Have Already Disclosed Investment Advice Fiduciary Status. If a covered service provider has already effectively disclosed investment advice fiduciary status, then no additional disclosure is required.
  • Service Providers Who Do Not Reasonably Expect to Provide Fiduciary Investment Advice. If a non-fiduciary covered service provider reasonably and in good faith believes it will not be providing services that would make it an investment advice fiduciary, then no additional disclosure is required. The DOL confirmed that no disclosure is required even though it is possible for actions or communications of individual agents, representatives or employees involved in implementing a service contract (e.g., call center employees) to exceed contract limits and constitute fiduciary investment recommendations.
  • Transitional Disclosure Requirement for Service Providers Who Will or Reasonably Expect to Provide Fiduciary Investment Advice. If a covered service provider will or reasonably expects to provide fiduciary investment advice as a result of the rule, the FAQ provides that such service provider need not use the term “fiduciary” to satisfy the 408b-2 regulation’s fiduciary status disclosure requirement if, in addition to any other required disclosures under the 408b-2 regulation, the covered service provider furnishes an accurate and complete description of the services that will be performed under the contract or arrangement, including the services that would make it an investment advice fiduciary. If such service provider has included a statement in its contracts or disclosures that it is not a fiduciary or it is not providing fiduciary services, revised contracts or disclosures are required. Importantly, this interim compliance standard only applies until the applicability date of the fiduciary status disclosure requirement contained in the BIC and Principal Transactions Exemption becomes effective, which, as described above, is proposed to be delayed until July 1, 2019.

Investment Education

The final rule recognizes “investment education” as one of several categories of activities that are not considered to involve a “recommendation” and thus generally would not cause the party engaging in such activity to be providing fiduciary investment advice. With certain modifications, the rule adopted a definition first set forth in 1996 that defined “investment education” to include (i) plan information; (ii) general financial, investment and retirement information; (iii) asset allocation models; and (iv) interactive investment materials, so long as such information or materials does not include any “recommendations” concerning specific investment products, investment managers or the value of investments.

Importantly, furnishing such information or materials is considered non-fiduciary investment education regardless of who provides such information or materials (e.g., plan sponsor, fiduciary or service provider); the form in which such information or materials are provided (e.g., on an individual or group basis, in writing or orally, or via call center, video or computer software); or the frequency with which such information or materials are provided.

The FAQ confirms that communications encouraging contributions at levels that maximize employer matching contributions, or to increase the likelihood of meeting objective financial milestones or savings goals based on the participant’s age, time to retirement, or other similar measures, would generally be considered “plan information” or “general financial, investment and retirement information” and therefore non-fiduciary investment education so long as no particular investment product or strategy is recommended. To illustrate, the FAQ contains a handful of hypothetical communications involving targeted emails (e.g., on birthdays or enrollment anniversaries), interactive computer tools, call center employees and plan enrollment brochures, all of which fall within the exclusion for investment education. The illustrations provide helpful clarification for plan sponsors concerned about whether their plan communication practices run afoul of the new rule.

The FAQ also confirms that communications relating to methods of increasing participation or contribution levels directed toward plan administrators or fiduciaries (instead of participants) can also be non-fiduciary investment education, provided the information or materials do not include recommendations as to specific investment products or strategies.