Just one month ago the U.S. Department of Labor released its long awaited final rule re-defining who is considered a “fiduciary” of an employee benefit plan under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (the Code). The final rule (which can be found here) targets those that give investment advice to a plan, its participants or its beneficiaries (including IRAs and 401(k)s); and, as a result, effectively expands the group of individuals who may be considered a fiduciary. Because of the definition’s expansion, a plan sponsor who may have freely provided recommendations and information in the past could now be on the hook as a fiduciary for this same behavior. The final rule is an extensive read. However, below are a few key points that may help provide a better understanding of how the April 10, 2017 final rule applicability date may affect plan sponsors in particular.
1. What is considered “investment advice?”
The final rule and the definition of a fiduciary hinges on this very point. Providing investment advice is what differentiates a non-fiduciary from a fiduciary under the new regulation. However, investment advice must be provided in the form of a recommendation. A recommendation is a “communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action.” Definition of the Term “Fiduciary”; Conflict of Interest Rule, 81 Fed. Reg. 20946, 20997 at § 2510.3-21(b)(1) (April 8, 2016)
Specifically, a person provides investment advice if they offer the following types of advice for a fee or other form of compensation (whether direct or indirect): (i) recommendations involving the advisability of acquiring, holding, disposing of, or exchanging, securities or other investment property, or a recommendation as to how securities or other investment property should be invested following their rollover, transfer or distribution from the plan; (ii) recommendations involving the management of securities or other investment property, including investment policies/strategies, portfolio composition, selection of investment account arrangements, selection of other persons to provide investment advice or investment management services, or recommendations with respect to rollovers, distributions or transfers from the plan (including whether, in what amount, in what form, and to what destination such a rollover, transfer or distribution should be made).
However, there are a few exceptions to the broad reach of providing investment advice. In particular, plan fiduciaries that are independent of the adviser and have financial expertise are identified as an exception in the final rule. Additionally, the marketing of retirement plan platforms (without regard to the plan’s individualized needs and with confirmation that the desire is not to provide impartial investment advice or serve in a fiduciary capacity) and providing responses to RFPs are not considered investment advice.
2. Investment Advice vs. Investment Education.
This much has not changed in the final rule: investment education can still be provided by service providers and plan sponsors without triggering fiduciary status, provided certain conditions are met. Investment education is considered non-fiduciary when it consists of providing the following: (i) information and materials that describe investments or plan alternatives without specifically recommending particular investments or strategies; (ii) general information about a plan; (iii) general financial, investment and retirement information; (iv) information and materials that provide a plan fiduciary, participant or beneficiary with models of asset allocation portfolios of hypothetical individuals with different time horizons; and (v) interactive investment materials (such as worksheets, software, questionnaires, etc. that generally provide the means to estimate and evaluate future retirement income needs and assess the impact of different allocations on that income).
However, it is worth noting that asset allocation models and interactive investment materials that identify specific products or investment alternatives must meet additional requirements as well. Primarily, they may only identify designated investment alternatives offered by the plan that are overseen by a fiduciary that is independent from the person who developed or marketed the investment alternative or distribution option. Additionally, other designated investment alternatives, if any, offered under the plan that have similar risk and return characteristics must be identified, the similar characteristics must be described, and participants must be notified where they can obtain additional information regarding the designated investment alternatives.
3. What about a plan sponsor’s employees who provide advice, are they fiduciaries?
Generally speaking, no. A major component of a recommendation being deemed “investment advice” is the receipt of a fee or other form of compensation for that advice. Because employees of plan sponsors are typically paid in the average course of their employment, any advice which they provide generally will not make them an investment advice fiduciary. Therefore, providing information to participants about the plan and distribution options is typically fine, assuming of course that the employee does not receive any payment outside of their normal compensation for work performed.
4. So, what now?
Under the final rule, many common practices are now considered investment advice. Therefore, more and more advice issued to participants will now invoke fiduciary status. Because of the expansion of the fiduciary definition, employers and plan sponsors are encouraged to review their policies and procedures to ensure that any information provided does not cross over into what is deemed “investment advice for a fee,” thus rendering the advisors a fiduciary.