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Get Your Fiduciary House in Order: DOL’s newest regulations require plan sponsor action

02.07.17

The majority of the U.S. Department of Labor’s (DOL’s) complex regulations mandating fiduciary status for individuals dealing with retirement investment decision-making involve investment advisors. But the regulations, which are scheduled to take effect on April 10, 2017, also require plan sponsors to take certain steps. Remember, plan sponsors are always the fiduciary, and the regulations expand the definition of fiduciary status.

A primer

Remember, the rules don’t remove fiduciary status from plan sponsor employees who already serve in that capacity. This includes investment committee members or any other individuals that have control over plan management or plan investments.

However, under the new rules, for an employee who provides advice to plan participants:

The employee’s job responsibilities cannot include providing investment advice or investment recommendations,
The employee may not be registered or licensed under federal or state securities or insurance laws,
The employee’s advice may not require registration or licensing under such laws, and
The employee may not receive any direct or indirect fee or other compensation in connection with the advice beyond the employee’s normal compensation for work performed for the employer.

Now’s the time for you to ensure that your in-house treasury, human resources and other investment staff can qualify for these exceptions.

Service provider questions

You’ll need to have a clear understanding of changes your plan’s service providers may make as they seek also to adjust to the new regulations. Service providers that already explicitly acted in a fiduciary capacity will continue to do so; the regulations don’t require any particular action on your part.

However, some service providers may, without changes on their part, fall into the fiduciary category. It’s up to you to determine whether they’ll either acknowledge their fiduciary status, or change their role to avoid it. Any vendor that takes on a fiduciary status must say so in writing.

The rule doesn’t impose fiduciary obligations on advisors if the advisor knows or reasonably believes that the fiduciary is a licensed and regulated provider of financial services or manages plans with $50 million or more in assets. Advisors seeking to rely on this provision may ask for a written representation that the employer is exercising independent judgment and is capable of evaluating investment risks. Further, the advisor must inform the employer of the existence of any financial interest in the transaction and the advisor cannot receive a direct fee in association with the advice being provided. 

BICE agreements

One way service providers, particularly those that are compensated according to the investment choices you make, can avoid fiduciary status is to change their business model and enter into an agreement with you known as a best interest contract exemption (BICE). That changes the nature of the business relationship in a manner that will be spelled out in the signed agreement.

When entering into a BICE agreement, determine how service providers intend to comply with the fiduciary rules. Assess whether the documentation they’ll provide (or already have provided) explaining any changes is sufficiently clear and complete. Then decide whether any changes in their role leave gaps in the services you need, particularly with respect to advice on investment solutions.

Rollover discussions

The regulations pull certain communications about IRA rollover options into the definition of advice — whether or not the plan sponsor urges participants to roll over plan funds into particular IRA investments. The DOL’s concern is that advisors who manage retirees’ IRAs will skew their communications about rollovers in favor of that option, to generate more revenue.

If communications merely explain the pros and cons of rolling over to an IRA in a completely neutral fashion, you’re OK. But if materials or suggestions by call center representatives suggest that one option might be more suitable than another, this could constitute advice conferring fiduciary status.

So what should you do? Establish a routine procedure to monitor communication materials supplied to participants to ensure that they stay on the education side of the education-advice boundary.

Complex decisions

The DOL regulations are complex; it might take months or even years for their practical application to be fully understood. Meanwhile, reviewing the actions here and discussing the regulations with your benefits specialist will help you avoid inadvertently assuming fiduciary duty.

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, contact Jenise Gaskin at (925) 296-1016 or visit us at www.bpmcpa.com/ebp.