Following one of the most controversial regulations-setting processes the retirement industry has witnessed, the Department of Labor has issued a final rule and related exemptions defining fiduciary status with respect to retirement plans. The DOL refers to this guidance as the “conflict-of-interest” rule, its purpose being to protect retirement savers from biased advice from financial advisers and investment professionals. While the majority of the rules won’t take effect until April 10, 2017, it is important for plan sponsors to understand what is expected of the financial advisers with whom they work.

Bloomberg/file photo

As defined in the new rule, investment advice includes providing investment or investment management recommendations to an employee benefit plan, plan fiduciary, participant or beneficiary, or an IRA, health savings account (HSA), or education savings account (ESA) owner. This includes recommendations to buy or sell investments, receive a distribution or execute a rollover or transfer, and manage investments. Here are five key aspects plan sponsors should understand:

1. “Recommendation” key to a finding of fiduciary investment advice. Key under the final rule to determining whether “fiduciary investment advice” has been given is whether a “recommendation” has occurred. This is defined as a communication that “would be reasonably viewed as a suggestion” to take a particular course of action, or refrain from doing so. The more the advice is tailored to the recipient, the more likely it will be viewed as a recommendation.

The final rule also clarifies that a “recommendation” to a plan participant, IRA, HSA or ESA owner to use the services of an adviser will not in itself be considered a fiduciary act.

2. Similar to proposal, final rule replaces 1975 regulations. The final rule replaces the five-part fiduciary test that dates back to 1975. Under the new rule, in order for the relationship to rise to fiduciary status, there must be receipt of direct or indirect compensation and a representation or acknowledgement that the adviser is acting in a fiduciary capacity; advice given pursuant to a verbal or written agreement, arrangement, or understanding that it is individualized to the recipient; or advice or a recommendation regarding an investing or account management decision related to a retirement plan, IRA, HSA or ESA.

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"It would seem that the retirement industry can hardly avoid planning and proceeding in a manner that would prepare them for eventual compliance."

3. Rule includes specific examples of communications that are not recommendations. Rather than provide carve-outs (as was the case in the proposed rule), the final rule provides a non-exhaustive list of certain types of communications that are not generally considered a recommendation. This includes making available a platform of investments, certain selection and monitoring assistance that meets objective criteria, general communications, and investment education.

4. ‘Investment education’ further clarified. Unlike the proposed rule, the final rule allows the use of asset allocation models and interactive education tools that identify specific investment options, as long as these are investment alternatives available in the plan that had been selected – and were being monitored – by a plan fiduciary. This is not being made available for IRA, HSA or ESA recommendations, because according to DOL, there is generally no independent fiduciary selecting investments for such plans.

5. Best interest contract (BIC) exemption remains. The BIC exemption introduced as a new concept in the proposed rule was retained, with modifications. The intent of the contract option is to allow existing, potentially conflicted compensation models to continue to be used if the following conditions are met:

  • A firm acknowledges fiduciary status for itself and its advisers.
  • Basic standards of impartial conduct must be adhered to in giving advice.
  • Compensation must be reasonable (not fully defined in the final guidance).
  • Procedures and policies must be in place to mitigate investor harm due to conflicts of interest.
  • Both potential conflicts and compensation arrangements must be disclosed.
  • The Employee Benefits Security Administration must be notified by email if a BIC is being used in an advising relationship.

The BIC includes a streamlined exemption for advisers compensated on a level-fee basis.

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"The final rule replaces the five-part fiduciary test that dates back to 1975."

While there remains a possibility that forces opposing the final rule may continue efforts to delay or derail it, it would seem that the retirement industry can hardly avoid planning and proceeding in a manner that would prepare them for eventual compliance, should the rule become effective as the DOL and supporters envision.

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