On the heels of Labor Secretary Alexander Acosta’s announcement that the Department of Labor’s oft-delayed “Fiduciary Rule” would finally take effect on June 9th, Congressmen introduced new legislation on June 8th to overturn it. The new bill’s sponsors, House Representatives Phil Roe (R-TN) and Peter Roskam (R-IL), and other opponents contend that the Fiduciary Rule is flawed and will make it harder for low- and middle-income families to save for retirement, while proponents argue that it will strengthen retirement planning by requiring financial advisors to act in their clients’ best interests. Given the back and forth, plan sponsors may still be unsure about how the Fiduciary Rule’s ongoing implementation lines up with existing fiduciary requirements and what steps, if any, they should be taking to prepare. This article will summarize what the Fiduciary Rule is, why it was delayed, and how it affects plan sponsors.
What is the “Fiduciary Rule?”
Plan sponsors already know that the Employee Retirement Income Security Act of 1974, as amended (ERISA) imposes certain duties on individuals or entities designated as fiduciaries to employee benefit plans. The Fiduciary Rule changes and expands that designation for investment advice fiduciaries. Under the Fiduciary Rule, an investment advice fiduciary is a person who:
- provides a recommendation for a fee or other compensation to a plan, plan fiduciary, plan participant or beneficiary, IRA or IRA owner with respect to:
- the advisability of buying, selling, holding or exchanging an investment or as to how to invest rollovers, transfers, or distributions from a plan or IRA; or
- the management of investments (policies or strategies) or rollovers, transfers, or distributions from a plan or IRA
- and either:
- represents or acknowledges that they are acting as a fiduciary;
- renders advice pursuant to a written or verbal agreement; or
- directs the advice to a specific recipient or recipients.
A recommendation, for these purposes, is a “communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action” and is individually tailored to the advice recipient. Notably, the Fiduciary Rule removes any requirements that the recommendation be given regularly or as the primary basis for the investment.
In connection with the Fiduciary Rule, the DOL also amended and issued new prohibited transaction exemptions from fiduciary conflict of interest rules to allow for certain common transactions involving investment professionals. Under the best interest contract exemption (BIC exemption), for example, financial institutions and their employees can accept commissions, 12b-1 fees, revenue sharing, etc. without violating conflict of interest rules if they meet certain requirements. Chief among these requirements are the impartial conduct standards, which requires financial institutions to act in the best interest of the investor, accept no more than reasonable compensation, and make no materially misleading statements with respect to the transaction or fees.
Why the Delay?
After earlier issuing, withdrawing, and re-issuing a proposed rule with significant public comment, the Department of Labor, under the Obama administration, published the final Fiduciary Rule on April 8, 2016. Its original applicability date was April 10, 2017. Shortly after President Trump took office, he issued a presidential memorandum directing the DOL to further review the Fiduciary Rule’s impact on access to investment advice. After a public comment period, the DOL amended the final regulations to provide that the applicability date of the Fiduciary Rule would be delayed until June 9, 2017, with certain provisions subject to transition relief until January 1, 2018. In particular, investment professionals seeking the BIC exemption need only follow the impartial conduct standards until the transition period ends, when conditions requiring the institutions to make certain disclosures and representations take effect. At that time, financial institutions may be required to disclose conflicts of interest, warrant adherence to the impartial conduct standards, and more.
Secretary Acosta’s pronouncement confirms that the DOL will not seek to intervene against these applicability dates. However, he has indicated that the DOL will again seek public comments on possible revisions to the rule in the future.
What Should Plan Sponsors Be Doing?
The Fiduciary Rule does not directly impact a plan sponsor’s fiduciary status, but it implicates its duty to monitor service providers and others affecting the plan’s investments. Plan sponsors may take some of the following steps as the rule is being implemented:
- Review the roles of employees involved with plan investments. Generally, employees of plan sponsors will not become investment advice fiduciaries when they provide advice to plan participants, as long as there is no fee beyond the employee’s normal compensation for work performed for the employer and the person’s job does not involve the provision of investment advice. Similarly, employees of plan sponsors will not become investment advice fiduciaries when they provide advice to plan fiduciaries, as long as there is no fee beyond the employee’s normal compensation for work performed for the employer. Plan sponsors should confirm that its employees (e.g., HR professionals) understand these parameters.
- Review services agreements with all service providers involved in plan investments. The Fiduciary Rule expands the definition of who may be considered an investment adviser. If a service provider will be newly covered by the Fiduciary Rule, amendments to the agreement may be necessary and should be closely reviewed. Such service providers may also introduce new or higher fees in connection with their new roles. In any case, plan sponsors should review any corresponding services agreements to ensure that fees are reasonable and that the service providers adequately address their new duties or otherwise explain their approach.
- Review plan communications and investment education materials. The plan sponsor should review any plan communications it issues, such as rollover notices, to ensure that descriptions are general and do not constitute advice. In addition, although the Fiduciary Rule excludes investment education from the definition of “recommendation,” plan sponsors should review any investment education materials to ensure that the description of any investment alternatives offered is consistent with the requirements of the exception.
- Document these steps. As part of plan sponsors’ own fiduciary duties, they must establish a prudent process and document their adherence to that process.
As plan sponsors undergo these steps, they should, as signaled by Secretary Acosta, continue to watch the Trump administration and Congress for possible changes to the Fiduciary Rule, including the new House bill.