Understanding the DOL’s proposal on fiduciary standards and retirement advice.
Issued on April 14, 2015, the Department of Labor’s (DOL) new proposal is the latest in an ongoing effort to dramatically alter the rules governing retirement investment advice under ERISA. What are the implications for plan sponsors, advisors and recordkeepers if this proposal becomes final regulation? We’ve outlined the highlights below.
NEW FIDUCIARY DEFINITIONS
The DOL’s new 2015 proposal — focused on investment advice providers — would greatly expand the scope of advisors who would be considered fiduciaries. It would eliminate the current five-part test for determining fiduciary status and replace it with a broader, more stringent definition.
Currently, under the five-part test, a person is considered a fiduciary that provides investment advice for a fee, if he or she: (1) makes recommendations as to the advisability of investing in, purchasing or selling securities or other property, or gives advice as to their value, (2) on a regular basis, (3) pursuant to a mutual agreement, arrangement or understanding, with the plan or a plan fiduciary, that (4) the advice would serve as a primary basis for investment decisions with respect to plan assets, and that (5) the advice is individualized based on the particular needs of the plan.
Under the current definition, selling activity, recommendations concerning the selection of other fiduciaries (including investment managers), providing education on Individual Retirement Account (IRA) rollovers, providing valuation or fairness opinions and recommending asset class allocations for plan investing activity, generally are not considered investment advice.
With the 2015 proposal, the new definition expands and renders fiduciary advice as: (1) providing investment or investment management recommendations or appraisals to an employee benefit plan, a plan fiduciary, participant or beneficiary, or an IRA owner or fiduciary and (2) either (a) acknowledging the fiduciary nature of this advice, or (b) acting pursuant to an agreement, arrangement, or understanding with the advice recipient that the advice is individualized to, or specifically directed to the recipient for consideration in making investment or management decisions regarding plan assets.
The new proposal continues to include appraisals and fairness opinions as a type of investment advice, subject to certain “carve- outs” for Employee Stock Ownership Plan (ESOP) valuations and valuations to comply with ERISA reporting and disclosure requirements. Inclusion of valuations could also impact the level and types of information plan sponsors may be able to receive from directed trustees or custodians
With the new proposal, plan sponsors, advisors and recordkeepers will want to assess the potential impacts on the marketplace for retirement plan products and services with the following questions and considerations.
What is the impact of the new proposal’s removal of current requirements that advice must serve as a primary basis for investment decisions, or that investment advice must come from a person that provides investment advice on a “regular basis”?
The removal of these requirements could impact the availability of certain services many plan sponsors have come to expect, such as sample fund menu support, investment option monitoring support and robust levels of call center support for participant questions
What is the impact of the new proposal’s treatment of IRA rollover advice as fiduciary advice?
Many plan sponsors and service providers provide distribution counseling to participants in reliance on the 2005 DOL advisory opinion stating that distribution recommendations do not, in and of themselves, give rise to fiduciary advisor status.
The reclassification of distribution recommendations as investment advice may necessitate a reconsideration of distribution counseling models and could raise conflict of interest concerns with respect to rollover recommendations to proprietary IRA rollover products or investment advice platforms
Will the new proposal implicate fund lineups, investment monitoring/ benchmarking, and the offering of various fund platforms by recordkeepers?
Recordkeepers may need to anticipate whether significant industry-wide change will occur at the same time and how they will prepare for it. Plan sponsors will need to revisit plan options
How do the new proposal’s modifications to the existing class exemptions affect the banks, brokers and insurance agents that rely on those exemptions for purposes of providing investment products and services to plans?
Banks, brokers and insurance agents may need to modify their compliance processes as well as amend existing contracts, which would be a major undertaking.
The new proposal includes a new, “principles-based” best interest contract exemption that permits the continued payment of commissions and revenue sharing payments. Plan sponsors and advisors will want to carefully evaluate the conditions of any such exemptive relief.
TIMING & NEXT STEPS
Note: A longer timetable would leave the regulation’s future uncertain given the change in administration that will take place in January of 2017.
Views stated are those of The Groom Law Group and should not be considere investment, legal or tax advice.