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DOL Fiduciary Rule Rocks Plan Investment Advice Landscape

08.01.16

When the final version of the U.S. Department of Labor’s (DOL’s) fiduciary standards rule for advisors to retirement plans was issued in April, the wait for the long-anticipated regulatory package was over. With the benefit of the intervening months, the implications for plan sponsors have become clearer.

A little background

For nearly a decade, concern was building within the DOL that retirement savers — whether through their IRAs or defined-contribution plan accounts — were being harmed by investment advisors who recommended investments that were more profitable for them rather than for their clients. With that in mind, the DOL had a call to action and issued regulations focusing on a more detailed definition of who is a “fiduciary.”

A transition rule gives plan sponsors and advisors time to adjust to the regulations’ detailed requirements. Specifically, while the new rule overall took effect on June 7, key provisions are delayed: The revised definition of fiduciary advice becomes effective April 10, 2017, and the best interest contract exemption (BICE) isn’t fully phased in until 2018.

Suitable vs. best interest

Previously, advisors were required to determine only that recommended investments were “suitable” for retirement investors — the same standard that applies to stockbroker suggestions for ordinary investors. That suitability standard is below that which fiduciaries are held to — acting solely in the best interest of plan participants, regardless of the financial implications for the advisor.

The DOL’s concern led to a proposed regulation in 2010 that was widely criticized within the financial industry. The proposed regulations would have disqualified the vast majority of advisors if they failed to change their business models and become conflict-free plan fiduciaries. The DOL went back to the drawing board, returning in 2015 with a substantially modified proposed rule.

The revised rule also unleashed a flood of industry-suggested improvements, many of which were incorporated into the final rule issued in April. A key feature of the 2015 proposal and final regulation is the creation of the BICE. It provides a path for advisors who would otherwise violate certain ERISA prohibited transaction rules to continue to advise retirement plans and IRA owners on investments.

Understanding BICE

The BICE “allows … registered investment advisors, broker-dealers and insurance companies, and their agents and representatives, that are ERISA or [tax] Code fiduciaries by reason of the provision of investment advice, to receive compensation that may otherwise give rise to prohibited transactions as a result of their advice to plan participants and beneficiaries.”

Rather than enumerating highly prescriptive requirements for exemption eligibility, the regulation articulates principles advisors must adhere to. Thus, if your financial advisor doesn’t otherwise satisfy the traditional fiduciary requirement of having no conflicts of interest, he or she must:

  • Acknowledge the advisor’s and the financial institution’s fiduciary duty to the investor and provide prudent advice that’s in the customer’s best interest,
  • Disclose compensation and other fee information and receive no more than reasonable compensation (“reasonable” being subjective),
  • Warrant that neither the advisor nor the financial institution will make any misleading statements about information pertinent to a transaction (including on such issues as fees, assets and conflicts of interest), and
  • Provide a list of the steps the advisor or financial institution will take to mitigate potential conflicts of interest.

In addition, advisors must adopt policies and procedures reasonably designed to mitigate any harmful impact of conflicts of interest. This includes disclosing basic information about their conflicts of interest and the cost of their advice. The advisor and financial institution must supply this information to “retirement investors,” but plan sponsors should be aware of all such communications.

What about fiduciary advisors who charge a flat fee? “Level fee fiduciaries,” as the final rule refers to them, must provide plan participants and beneficiaries with a written statement of their fiduciary status, comply with the standards of impartial conduct, and document the specific reason or reasons for the recommendation of the level fee arrangement.

Time to act

The DOL’s fiduciary standards rule pertains to providing investment advice, as opposed to general financial education and guidance. (See “What is ‘advice’?”) Because the final rule is complex, consult your benefits specialist about how the regulation affects your particular arrangements with investment advisors.

BPM is one of the largest California-based accounting and consulting firms, ranking in the top 50 in the country. It has served the San Francisco Bay Area's emerging and mid-cap businesses, as well as high-net-worth individuals, since 1986. Our Employee Benefits team consists of professionals with extensive knowledge of ERISA guidelines and deep expertise performing employee benefit plan audits. We can help you craft a smooth-running plan that serves your employees while mitigating associated risk. For more information or for a free expert consultation, Jenise Gaskin at (925) 296-1016 or Mike Spence at (408) 961-6303 or visit us at www.bpmcpa.com/ebp.

What is “advice”?

Investment advice, under the U.S. Department of Labor’s (DOL’s) fiduciary standards rule, means making a recommendation that someone take a specific action, or refrain from doing so, and being compensated, directly or indirectly, for doing so. But what exactly is this?

According to the Plan Sponsor Council of America, the following are not subject to the revised fiduciary rules:

Most important, the DOL’s rule doesn’t consider providing investment education, general financial investment and retirement information to be investment advice. Thus, human resources personnel that generally respond to employee questions aren’t considered fiduciaries under the new rules.

Keep in mind that these rules also apply to recommendations associated with Individual Retirement Accounts (IRAs).

  • Providing an investment platform without regard to individualized investment needs,
  • Identifying investment options that satisfy the pre-established investment criteria of an independent plan fiduciary, and
  • Providing general investment communication that a reasonable person wouldn’t view as investment advice, such as newsletters, general marketing materials and general market data.

Most important, the DOL’s rule doesn’t consider providing investment education, general financial investment and retirement information to be investment advice. Thus, human resources personnel that generally respond to employee questions aren’t considered fiduciaries under the new rules.

Keep in mind that these rules also apply to recommendations associated with Individual Retirement Accounts (IRAs).

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