Tag Archives: Fiduciary rule

April 11, 2016

New Fiduciary Rule Applies Stricter Standard to Most Retirement Account Advisers

By Rebecca Hudson, Bret Busacker, and Molly Hobbs

In its long-awaited final fiduciary rule, the Department of Labor (DOL) establishes stricter fiduciary standards for investment advisers and consultants providing services to ERISA plans and IRAs. Intended to offer additional protection to ERISA plan participants and IRA owners, the final rule issued on April 7th broadens the application of the ERISA fiduciary standard to many investment professionals, consultants, and advisers who previously had no obligation to adhere to ERISA’s fiduciary standards or to the related prohibited transaction rules.

Final Fiduciary Rule Replaces Five-Part Test

Since 1975, ERISA and its implementing regulations have defined “fiduciary” and “investment advice” narrowly. Under ERISA Section 3(21)(A), a “fiduciary” is someone who has the authority and/or responsibility to provide investment advice under a retirement savings plan and is compensated for doing so. Investment advisers and consultants who are a fiduciary with respect to an ERISA plan or IRA engage in a prohibited transaction if they receive “conflicted compensation” (e.g., commissions, trailing commissions, sales loads, 12b-1 fees, and revenue-sharing payments) from third parties with respect to the investments they recommend to these ERISA plans and IRAs.

In 1975, the DOL created a five-part test to identify an ERISA fiduciary. An adviser or consultant who does not acknowledge his or her fiduciary status with respect to a plan will nonetheless be a fiduciary with respect to the plan if the adviser enters into an agreement to regularly provide individualized investment advice that will serve as the primary basis upon which the advice recipient will make investment decisions (the “five-part test”).

Believing that the retirement landscape has changed significantly since 1975, including the prevalence of participant-directed 401(k) plans and the extensive use of individual retirement accounts (IRAs), in 2010, the DOL proposed to broaden the definition of investment advice. The DOL subsequently withdrew the 2010 proposed rule in response to significant push back from various stakeholders. In 2015, a new proposed rule was published that eliminated the five-part test and extended fiduciary status to those advisers who provide advice that is individualized or specifically directed to the advice recipient. In response to the wide range of comments it received on the 2015 proposed rule, the DOL made significant changes to the final fiduciary rule, but kept much of the expansive nature of the 2015 proposed rule.

General Structure of the Final Fiduciary Rule

In today’s marketplace, many investment professionals, consultants and advisers have no obligation to adhere to ERISA’s higher fiduciary standards or to the prohibited transaction rules because they do not satisfy each prong of the five-part test. The DOL expects that broader application of the fiduciary standard under the final fiduciary rule will more closely align the advisers’ interests with those of their customers, while reducing conflicts of interest, disloyalty, and imprudence.

Under the final rule, an investment adviser or consultant that makes a “recommendation” to a plan or IRA for a fee or other compensation that is customized for or specifically directed at the plan or IRA may be a fiduciary. For purposes of the final fiduciary rule, a “recommendation” includes providing advice with respect to:

  • buying, holding, selling, exchanging, or rolling over securities or other investment property, or
  • management of securities or other investment property, investment policies or strategies, portfolio composition, selection of other persons to provide investment advice or services, selection of investment account arrangements, and recommendations with respect to rollovers, distributions, or transfers from a plan or IRA.

Accordingly, an investment adviser or consultant who makes an investment recommendation (as defined above) and receives conflicted compensation in connection with the advice provided to the plan or IRA will engage in a prohibited transaction unless one of the enumerated carve-outs from the rule applies or the adviser/consultant complies with the “Best Interest Contract Exemption” requirement.

What You Need to Know

Plans, their affected financial advisers, and other service providers have until April 10, 2017 to prepare for any change from non-fiduciary to fiduciary status. Notably, there are also two exceptions to the effective date, which will provide more time for certain service providers to adapt to the new standards. In particular, the Best Interest Contract Exemption and rules regulating advice with respect to the advisers proprietary funds will have a transition period during which fewer conditions apply, from April 2017 to January 1, 2018, at which time the rule will be fully implemented.

ERISA plans should begin now to review their relationship with their current investment adviser/consultant. Some things plans should consider include:

  • Determine if an adviser or consultant is currently a fiduciary under the new fiduciary rule.
  • Determine if one of the rule carve-outs applies to the services provided by adviser or consultant.
  • Discuss the Best Interest Contract Exemption with any adviser that is a fiduciary and determine the best way to document and comply with that exemption.

In conducting this review, plans should interpret the general fiduciary rule broadly and interpret any of the enumerated carve-outs narrowly. Fiduciaries should expect that advisers will provide written documentation of their role and their satisfaction of any carve-out. Plans should require advisers to indemnify the plan from any prohibited transaction that arises as a result of its failure to comply with any carve-out or exemption.

For more information about this rule, its carve-outs and the Best Interest Contract Exemption, please read our full summary.

April 28, 2015

Retirement Plans: Proposed Changes to the Fiduciary Rules Offer An Opportunity For Introspection

Busacker_BBy Bret Busacker

The Department of Labor (DOL) recently published long-promised revisions to the rules regulating investment advisers to retirement plans and their fiduciaries, participants and beneficiaries, as well as IRAs and their owners and beneficiaries (Advice Recipients). The new proposed fiduciary regulations (2015 Proposed Rule) are the DOL’s most recent attempt to modernize long-standing labor rules that predate the creation of the 401(k) plan and the widespread use of IRAs. In 2010, the DOL attempted to revise these same regulations, but withdrew the proposed changes after receiving significant pushback from stakeholders. We’ll have to see if its second effort is more successful.

Role of Investment Advisors Are At Issue

The crux of the issue is that plan fiduciaries must act in the best interest of their Advice Recipients. Under ERISA and the Internal Revenue Code, if a fiduciary uses plan or IRA assets for their own advantage, it is a prohibited transaction. For example, a fiduciary adviser who receives compensation from a third party (i.e., the plan recordkeeper or platform provider) to recommend a particular investment to an Advice Recipient may be engaging in a prohibited transaction. Fiduciaries who are a party to a prohibited transaction may be subject to penalties and lawsuits from plan participants. 

In the past, investment advisers have navigated around this issue by serving in a non-fiduciary consulting capacity with respect to their Advice Recipients. The current long-standing regulations generally treat an adviser as a fiduciary only if the adviser enters into an agreement with an Advice Recipient to regularly provide individualized investment advice that will serve as the primary basis upon which the Advice Recipient will make investment decisions. (This is generally referred to as the “five-part test.”) Each element of the five-part test must be satisfied in order for an adviser to be considered a fiduciary. 

Investment consultants take the position that they are not fiduciaries under the five-part test because they either do not provide regular advice to the Advice Recipient or the advice they provide is not the primary basis of the Advice Recipient’s investment decision. Plans that use investment consultants who do not assume fiduciary responsibility should be aware that the 2015 Proposed Rule may ultimately characterize these consultants as fiduciaries. 

Expanded Fiduciary Activity

Under the 2015 Proposed Rule, an adviser will be a fiduciary to an Advice Recipient even if the adviser does not regularly provide investment advice to the Advice Recipient and even if the advice is not the primary basis for the Advice Recipient’s investment decision. Instead, under the 2015 Proposed Rule, an adviser may become a fiduciary if the adviser receives a fee for the advice and the adviser either (i) represents or acknowledges that he or she is acting as a fiduciary with respect to the Advice Recipient or (ii) agrees in writing or verbally to provide the Advice Recipient with advice that is individualized or specifically directed to the Advice Recipient. 

Under the 2015 Proposed Rule, investment advice generally includes:

  • a recommendation to acquire, hold, dispose or exchange an investment, including in connection with a participant’s distribution or rollover from a plan or IRA;
  • a recommendation with respect to the management of an investment, including in connection with a participant’s distribution or rollover from a plan or IRA;
  • an appraisal, fairness opinion, or similar oral or written statement concerning the value of an investment in connection with a transaction involving a plan or IRA; or
  • a recommendation to hire another service provider who will provide investment advice.

Under the 2015 Proposed Rule, a “recommendation” includes an adviser’s suggestion for the Advice Recipient to take a particular course of action with respect to an investment under the Advice Recipient’s control. 

Common Plan Administration Carve-Outs 

Notwithstanding the apparent breadth of the 2015 Proposed Rule, the rule contains a number of helpful carve-outs that identify common situations in which an adviser will not be considered a plan fiduciary, as summarized below. 

  • Providing a plan or IRA with an investment platform, provided that the recordkeeper or platform provider notifies the Advice Recipient that it is not providing investment advice or serving as a fiduciary.
  • Identifying investment options that satisfy the pre-established investment criteria of an independent plan fiduciary (e.g., expense ratios, size of fund, type of asset, etc.) and/or providing benchmarking information to the independent plan fiduciary.
  • Providing basic investment information that assists a plan in complying with reporting and disclosure requirements.
  • Providing investment education that is limited to investment concepts (e.g., risk and return, diversification and dollar-cost averaging) and objective questionnaires, worksheets and interactive software.
  • Selling investments to an Advice Recipient who has the requisite investment background and who is properly informed that the broker is not undertaking to impartially advise the plan. This carve-out generally only applies to larger retirement plans.

The 2015 Proposed Rule also provides a means by which an adviser who falls within the definition of a fiduciary may continue to receive conflict-of-interest compensation by satisfying certain safeguards and disclosure requirements.

Take Aways

The definition of a fiduciary under the 2015 Proposed Rule is quite broad and, if adopted, will certainly expand the number of advisers who are treated as adviser fiduciaries to retirement plans and IRAs. However, even if the 2015 Proposed Rule is not adopted, Advice Recipients should take this opportunity to review their relationship with their current investment adviser. If an adviser is not currently a fiduciary, but provides recommendations with respect to investments, consider asking the adviser whether he or she is able to be a fiduciary and whether changes will be required to the relationship if the rule is finalized. These questions may spark a helpful conversation that clarifies the adviser’s role and informs the Advice Recipient of whether changes to the relationship may be required (even if the rule is not finalized).

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