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New Fiduciary Rule

This morning the Department of Labor (DOL) released final regulations addressing conflicts of interest in retirement plan advice.  Popularly known as the “fiduciary rule”, the final regulations impact persons that provide “covered investment advice” to plan sponsors, plan participants and beneficiaries, fiduciaries, and IRA owners.

What is Covered Investment Advice?

Covered investment advice is defined as “a recommendation to a plan, plan fiduciary, plan participant and beneficiary and IRA owner for a fee or other compensation, direct or indirect, as to the advisability of buying, holding, selling or exchanging securities or other investment property, including recommendations as to the investment of securities or other property after the securities or other property are rolled over or distributed from a plan or IRA.”[1]  The definition also includes recommendations on investment policies or strategies, portfolio composition, selection of investment account managements, or recommendations on rollovers, transfers, or distributions from a retirement plan to an IRA.

The key aspect of this definition is whether or not a recommendation has occurred.  According to the rule, a recommendation is a communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the participant engage in or refrain from taking a particular course of action.[2]  The more specific and individually tailored the communication, the more likely the communication will be viewed as a recommendation and therefore fall under the provisions of the fiduciary rule.

The DOL listed three types of relationships that must exist for a recommendation to trigger fiduciary status.  This includes both direct and indirect recommendations in exchange for a fee or other compensation.  If a person:

  • Represents or acknowledges that they are acting as a fiduciary within the meaning of ERISA or the Internal Revenue Code (Code);
  • Renders advice pursuant to a written or verbal agreement, arrangement or understanding that the advice is based on the particular investment needs of the advice recipient; or
  • Directs the advice to a specific recipient or recipients regarding the advisability of a particular investment or management decision with respect to securities or other investment property of the plan or IRA.

What is Not Covered Investment Advice?

Education is not considered investment advice regardless of who is providing the educational information.  In the context of retirement plans, the education provision allows specific investments to be included as examples when presenting hypothetical situations intended to educate plan participants so long as the specific investments are designated investment alternatives selected or monitored by an independent plan fiduciary.  The education provision does not apply when similar information is given in the IRA context.  General communications to plan participants are also excluded from this definition, provided a reasonable person would not view the communication as investment advice.

The Best Interest Contract Exemption

The Best Interest Contract Exemption (BIC) allows firms to continue to rely on many current compensation and fee structures, so long as firms adhere to certain conditions that minimize conflicts of interest and provide advice that is in the best interest of their clients.  BIC requires financial institutions to acknowledge that the firm and its advisors are fiduciaries.  The firm and advisors must then give prudent investment advice in the best interest of the client, avoid making misleading statements, and receive reasonable compensation.  The financial institution must create disclosures about any conflicts of interest and cost of advice.

The final regulations require a regularly updated website that contains information about the financial institution’s business model, any associated conflicts of interest, a written description of the institution’s policies to mitigate the conflict, and disclosure of any compensation and incentive arrangements with advisors or third parties.

Effective Date

Most of the provisions in the final rule take effect in April of 2017.  The DOL has instituted a phased implementation approach for BIC and an as yet unreleased amendment to Prohibited Transaction Exemption 84-24 (PTE 84-24).  From April 2017 to January 2018, firms and advisers must comply with all impartial conduct standards and provide notice to retirement plans and participants that acknowledge their fiduciary status and describe any conflict of interest.  Full compliance with BIC and PTE 84-24 will be required in January 2018.

As an independent third-party administrator, the final regulations do not affect NBS services directly.  However, NBS will continue to study and monitor developments on the fiduciary rule and its impact on all of our partners in the retirement plan community.  To ensure that you receive all updates, please subscribe to this blog.