In April 2016, the Department of Labor (DOL) released the final version of the fiduciary rule. The final rule was six years in the making, and impacts retirement plans, including 401(k) plans, and the employers who offer 401(k) plans to their employees. The final fiduciary rule raises the requirements that apply to investment advisors who provide advice to retirement plans. The final rule clarifies the type of investment advice that will be subject to the new standards and requirements, and includes examples of investment-related communications that would not be considered advice subject to the new requirements. The final rule is intended to reduce conflicts of interest for advisors who provide investment services to 401(k) plans and other retirement plans.
Under the final rule, a fiduciary includes any person who receives fees or any form of compensation for investment recommendations that are specifically tailored to a particular retirement plan sponsor, participant or beneficiary for consideration in making an investment decision. If an investment advisor is considered a fiduciary under the final rule, he or she is required to disclose conflicts of interest and provide advice in the client’s best interest. The investment advisor is precluded from accepting any fees or other compensation for investment advice if the advice creates a conflict of interest, unless the advisor qualifies for an exemption under the rules.
Who Is Impacted By the Fiduciary Rule?
Any party who provides investment advice to retirement plans; fiduciaries of retirement plans; retirement plan participants or beneficiaries; employers who sponsor retirement plans; or IRAs must ensure that any fees or compensation received in connection with such advice does not create a conflict of interest, unless there is an exemption available. In addition, investment advisors will be required to acknowledge their status as fiduciaries by reason of the provision of such advice. Historically, many advisors have shied away from acknowledgment of their fiduciary status in the context of retirement plan investment advice, so this new requirement will be a change for many. Employers who sponsor retirement plans will be affected as well because they will need to monitor compliance by their advisors, and ensure that the proper contracts and acknowledgements are in place. However, the primary burden for compliance with the final fiduciary rule falls upon the investment advisor.
What Constitutes Investment Advice?
During the six-year-long rulemaking process, many parties voiced concerns about the impact the rule would have on investment education. Many investment advisors provide certain investment education services as part of their services to 401(k) plans. The concerns centered around the possibility that advisors’ distribution of basic and general information regarding potential 401(k) plan investments would be considered a fiduciary act that would invoke application of the rule and all the standards that apply. The DOL has addressed concerns about basic investment advice being considered fiduciary in nature by identifying certain investment education activities as those that will not be considered “fiduciary conduct.”
Under the final fiduciary rule, the provision of investment advice will not be considered a fiduciary act if a reasonable person would not view it as an investment recommendation. Although the DOL’s intent was to make the carveout clear, it is still a fairly subjective standard.
The following types of activities will not be considered investment advice under the final rule: general communications including widely circulated newsletters, market research and general marketing materials; material that is publicly broadcasted; conference presentations; and other similar materials that no reasonable person would view as investment advice. In addition, if an investment advisor or other retirement plan service provider simply makes available a platform of investment alternatives, without considering or taking into account the specific needs of the retirement plan or its participants, the mere availability of the platform will not be considered a recommendation that would be considered investment advice, provided the advisor also represents in writing that such advice is not investment advice and that it is not being provided in any fiduciary capacity.
What is the Best Interest Standard?
The final rule includes the Best Interest Standard, which will require that investment advisors adhere to the fiduciary requirements under ERISA. The fiduciary requirements under ERISA require advisors to disclose any possible conflicts of interest and to provide advice that is in the best interests of their clients, including plan participants, and not their own. If an investment advisor fails to act in the best interest of a client, the client will have some recourse against the advisor under ERISA.
When Does the Rule Become Effective?
The implementation of the final rule is phased in over a period extending from April 10, 2017 to January 1, 2018.
What Does the New Rule Mean for Plan Sponsors?
The primary compliance obligation of the final fiduciary rule is on investment advisors who provide retirement plan investment advice. However, the final rule will also affect employers who sponsor retirement plans because they will be required to interact with investment advisors who will be tackling compliance with the rule, and, in some cases, employers will need to redefine their relationship with such advisors. In addition, because investment advisors will have increased compliance obligations, there are likely to be increased costs associated with the provision of investment advice and services. It is always prudent to reevaluate a relationship with a retirement plan provider, whether investment or otherwise. In light of the final rule, we recommend that plan sponsors carefully review the relationship they have with their retirement plan advisors to determine the extent of any fiduciary relationship that may exist. We are happy to assist with any questions you may have in this area.