The Department of Labor (DOL) released a new proposed rule last week that will change who is considered a fiduciary of a qualified plan, IRA or health savings account (HSA) (the Fiduciary Rule). We believe this rule will have limited impact on plan sponsors. However, given the extensive commentary on the Fiduciary Rule, plan sponsors should understand how the Fiduciary Rule could impact them. The Fiduciary Rule:
- Changes when investment education is considered advice
- Changes when assistance with distribution options is considered investment advice
- Clarifies when service providers, consultants or salespeople are fiduciaries
Who is a Fiduciary?
The new Fiduciary Rule will require plan sponsors to revisit which service providers are fiduciaries to their retirement plans and, in some cases, HSAs. Under current law, a person who provides investment advice is not considered a fiduciary unless he or she satisfies a five part test, which was heavily criticized by the DOL. Under the new Fiduciary Rule, a person is a fiduciary if he or she provides advice regarding:
- Buying, holding, selling, or exchanging securities or other property
- Managing securities
- An appraisal of securities or other property in connection with a transaction
- A recommendation for an investment adviser
- Represents or acknowledges that he or she is a fiduciary
- Provides individualized or specifically directed advice to consider in making an investment decision (including rollovers from an ERISA plan or IRA)
The new Fiduciary Rule expands the current definition of a fiduciary in three ways. Under current law, a service provider is only a fiduciary if he or she offers advice on a regular basis and the parties mutually agree the advice will be used as a primary basis for investment decisions. The Fiduciary Rule provides that investment advisers can be fiduciaries even if they only offer advice on a one-time basis. Similarly, they may be fiduciaries even if they disclaim any agreement that their advice will be used as a primary basis for investment decisions. Further, investment “education” which mentions specific investments may be classified as specifically directed advice.
Exempted Transactions and Advisers
The Fiduciary Rule provides a number of exceptions. The following service providers are generally exempt from being deemed a fiduciary solely based on the following activities:
- Individuals who offer advice in their capacity as an employee of the plan sponsor, provided they do not receive additional compensation for doing so
- Service providers who present to plan sponsors investment options available on their record keeping platforms and websites
- Service providers who respond to a plan sponsor request for replacement options or funds in a particular category based solely on objective criteria
- ESOP appraisers (we expect future guidance)
- Individuals providing true investment “education,” but not advice
Under the Fiduciary Rule, any example, worksheet, or explanation that identifies specific investment alternatives or products may be reclassified as investment advice, rather than investment education.
In light of these changes, plan sponsors should determine whether service providers that furnish participant education are fiduciaries under the above rule. If these education programs are not adjusted, all service providers who are fiduciaries will need to provide disclosures to participants and enter into a “Best Interests Contract” with them as described below. Similarly, plan sponsors should review their contracts with “nonfiduciary” service providers, discuss the service provider’s potential fiduciary status, and document the service provider’s fiduciary status accordingly.
Prohibited Transaction Exemptions
The DOL also released a prohibited transaction exemption (“PTE”) that allows investment advisers to receive compensation in connection with recommendations they make. To qualify for the exemption, the investment advisers must enter into a “Best Interests Contract” (i.e., provide certain acknowledgements and disclaimers). This exception may be used in a number of situations, but seems to be focused on extending ERISA fiduciary standards to anyone providing advice on IRAs. Participant education providers may be able to use this PTE to continue providing services that identify them as fiduciaries under the new rule.
The new Fiduciary Rule is a proposed rule. However, we expect the Fiduciary Rule to be finalized in substantially the same form and become effective sometime in 2016. Plan sponsors should take advantage of this time to:
- Review whether participant education providers are fiduciaries under the new rule and revise programs or make preparations to comply with the new disclosure and agreement requirements.
- Review, discuss, and document the fiduciary status of other service providers and consultants who may be fiduciaries under the new Fiduciary Rule.
For assistance with determining the impact of the Fiduciary Rule on your plan or the services you provide, please contact a member of the Kutak Rock Employee Benefits Practice Group.