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.
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.
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.
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.
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.
Sidebar: Education or advice?
The recent U.S. Department of Labor’s (DOL’s) fiduciary regulations require taking a close look at the distinction between investment education and investment recommendations or advice. The regulations confer fiduciary liability on those giving advice, so you’ll need to make sure the educational materials that you — or service providers — supply don’t cross the line to become advice.
The DOL guidance from a decade ago, in Interpretive Bulletin 96-1, still is valid today. Generally, plan information, general financial and investment information, asset allocation models, and interactive investment materials will be deemed educational.
Its description of investment advice is relatively specific, but ends with a caveat that the “facts and circumstances of a particular case” ultimately determine the assessment. The new DOL fiduciary regulations hold plan sponsors responsible for monitoring education materials to ensure they don’t evolve and stray across the line between education and advice. Be sure to review all of your educational materials with your benefits specialist.