The Department of Labor’s (DOL’s) fiduciary rule became applicable on June 9, so an “investment advice fiduciary” under ERISA now includes any paid advisor who recommends an investment or course of action to an individual retirement account (IRA) holder, retirement plan participant or retirement plan sponsor. All investment advice fiduciaries are subject to ERISA’s fiduciary standards, which generally require that fiduciaries act solely in the interests of participants and beneficiaries.
The rule primarily affects individuals and organizations that provide investment advice to IRA holders, as they are only now subject to ERISA’s fiduciary standards. Investment advice provided to large retirement plans — those whose assets exceed $50 million — is generally exempt under the rule because such plans are governed by ERISA fiduciaries who must exercise independent judgment over plan assets. Employers, corporate boards and retirement plan committees were already subject to ERISA’s fiduciary standards and required to act in participants’ best interests when selecting or monitoring service providers.
Because implementation of the fiduciary rule may result in changes to certain service delivery models, the effect on sponsors of large retirement plans will mostly involve their relationships with service providers. For example, some defined contribution (DC) plan vendors will continue providing only non-fiduciary investment education, while others plan on delivering investment advice to participants in a fiduciary capacity, which requires a fiduciary assessment. Plan fiduciaries should understand and assess these changes in accordance with their obligations under ERISA.
The following are some of the near-term actions that fiduciaries of employer retirement plans may need to take:
- Find out whether the DC vendor will modify its services. Will the vendor provide only non-fiduciary investment education or will it acknowledge fiduciary status and provide participant-level investment advice (specifically regarding whether a participant should roll over a plan distribution and where to direct it)?
- If the DC vendor will be acting as a fiduciary, evaluate its capabilities. Plan fiduciaries must evaluate the vendor in its capacity as a provider of participant-level investment advice in a prudent manner and solely in the interests of plan participants, both in awarding and continuing the service contract. Plan fiduciaries should conduct a diligent review of the vendor’s services and document the review process.
- Amend service contracts as necessary. To the extent a DC vendor changes its delivery of participant-level investment advice, plan fiduciaries may need to amend service agreements. Additionally, investment advisors may require plan fiduciaries to agree to certain representations regarding their exercise of independent judgment over assets in large plans. All such contractual changes should be reviewed carefully.
- Review/monitor employee exception guidelines. As long as certain guidelines are followed, employees who provide investment recommendations to plan fiduciaries or to other employees will not be considered fiduciaries, even when their advice would otherwise make them an investment advice fiduciary. Plan sponsors are responsible for ensuring that these guidelines are being followed.
- Monitor the vendor. As part of their oversight responsibilities, plan fiduciaries must monitor the vendor’s participant-level investment advice to ensure it complies with the rule and ERISA’s fiduciary standards. Fiduciaries must also review investment education materials, such as forms, disclosures, call center scripts, call center employee training materials and interactive retirement planning tools, to ensure they are consistent with the desired approach.
- Evaluate asset allocation models. Designated investment alternatives (as defined under DOL regulations) may be identified in asset allocation models. Under the rule, however, a responsible fiduciary must evaluate the models and materials to ensure that they are unbiased, and not designed to favor investments that deliver higher fees or compensation to parties that provide investments or investment-related services to the plan.
RFI and response brief
The DOL’s recently issued request for information (RFI) identifies areas where the DOL is considering further actions or modifications. The RFI asks for comments on whether to delay the requirements slated to take effect on January 1, 2018, and allows only 15 days for responses (the RFI allows 30 days for responses to the other issues). The DOL asked about any recent innovations in investment products that satisfy the exemptions, and whether it should modify the exemptions to accommodate such new products and services. The RFI also asked for comments on whether to exempt advice to make or increase retirement plan contributions from the rule.
Meanwhile, the DOL recently filed a response brief with the 5th Circuit Court of Appeals relating to the Chamber of Commerce’s appeal of the decision confirming the DOL’s authority to promulgate the fiduciary rule. While much of the DOL’s brief counters the Chamber’s arguments, the DOL made a significant concession for the best interest contract (BIC) exemption. Investment advisors are currently prohibited from using the BIC exemption if their contract includes an anti-arbitration clause to prevent investors or participants from pursuing class action lawsuits. In its brief to the 5th Circuit, the DOL said that it will no longer defend that prohibition in light of its position in another case pending before the Supreme Court.