In the plan sponsor and financial adviser community, as 2016 gives way to 2017, all eyes will be on the Department of Labor’s (DOL) fiduciary rule. As we blogged previously, the new rule will impose many new obligations on advisers, and plan sponsors also will have to be mindful of how these changes affect their relationships with their advisers. We have seen some articles that speculate that the new administration may delay or weaken, if not repeal, these new regulations. As we publish this blog, there already has been a bill introduced in the new Congress to delay the effective date of these rules for two more years. Yet, we believe that whether the new rules are delayed, weakened, or left intact is largely irrelevant. The attention that the new rule has received has created such a focus and interest on fees, conflicts of interest, and the value that financial advisers provide to their clients that plan sponsors need to demonstrate now more than ever why the services their advisers provider are in the best interest of their participants.
As a brief overview and reminder, the DOL’s new fiduciary standard expanded the definition of who is a fiduciary by virtue of providing investment advice to plan sponsors and participants. Essentially, almost any piece of advice that can be considered a recommendation to buy, sell, or hold a security makes an adviser a fiduciary. This expanded definition, however, could make many traditional arrangements prohibited transactions because the payments that advisers receive potentially could be considered to create conflicts of interest. In response to that concern, the final rule published a “Best Interest Contract Exception” (BIC Exception).
The BIC Exception allows advisers to receive compensation that otherwise could be prohibited (e.g., 12b-1 fees and revenue sharing payments) so long as they provide advice that is in the “best interest” of the client (essentially a combination of prudence and loyalty concepts). To satisfy this best interest requirement, advisers must disclose information about the services they provide, fees, expenses, and potential conflicts. They almost must demonstrate that they are providing advice that is in the “best interest” of their clients. Advisers whose compensation is based on a level fee (a fixed percentage of assets under management) have fewer disclosures to make under a “BIC Light” exception. In subsequent FAQs, however, the DOL explained that an adviser who receives third party payments is not a level fee adviser. Essentially, BIC Light will be applied narrowly.
What does all of that mean for plan sponsors? As of today, the new rule becomes effective April 10, 2017, although the full BIC Exception requirements need not be satisfied until Jan. 1, 2018. If the new rules become effective on those dates, plan sponsors should expect new disclosures from their advisers (if they haven’t received them already). If the new rules are delayed or eliminated, we would still caution plan sponsors not to get too excited. The attention and commentary surrounding the new fiduciary rule has let the genie out of the bottle in terms of educating people about fees, conflicts of interest, and transparency. Participants in ERISA plans (and plaintiff lawyers) will be watching plan sponsors and fiduciaries closely to make sure they are acting prudently and solely in the interest of participants. As such, we recommend that plan sponsors take the following steps sooner rather than later.
- Review all existing advisory relationships to determine which entities will be considered fiduciaries under the new rule.
- Review existing educational materials provided to participants to determine whether they remain non-fiduciary “education,” or whether they are fiduciary investment “advice.”
- Review practices related to rollovers into and out of the plan to determine whether they trigger fiduciary obligations.
- Confirm that in-house employees who provide advice to participants are not being separately compensated for such advice (which will help those employees avoid the new fiduciary requirements).
- Confirm that existing plan investment managers can continue to rely on any needed prohibited transaction exemptions.
- Analyze contractual arrangements with advisers to confirm fiduciary status and compliance with rules and related exceptions. Those who become fiduciaries under this new rule should be providing ERISA 408(b)(2) fee disclosures.
- Confirm that the fee structure and amounts of compensation received by advisers are not prohibited transactions. In particular, ERISA 408(b)(2) fee disclosures should be reviewed to ensure that the overall arrangement is reasonable in light of the service performed.
We expect that there will be plenty more to be seen on the fiduciary front, but some practices will always withstand the test of time.