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With the Department of Labor’s fiduciary rule becoming “applicable” on June 9, 2017, in this current outlook we review the way in which it will apply during 2017, consider its significance for plan sponsors, and briefly review Congressional repeal proposals.
On April 7, 2017, DOL issued a regulation delaying the applicability date of its 2016 Fiduciary Rule for 60 days, until June 9, 2017. In that regulation DOL also delayed compliance with certain requirements of the exemptions that were part of its 2016 fiduciary “regulation package” (including, e.g., the Best Interest Contract (BIC) Exemption) until January 1, 2018. But, as it explained in the preamble, DOL has concluded that the new rule (as distinguished from the related exemptions) would not be affected by the review directed by President Trump and would apply, without modification, beginning June 9, 2017.
Thus, as of this writing, the rule is both “effective” and “applicable,” and providers and sponsors must now comply with it.
We discussed the new rule in detail in our article DOL finalizes re-definition of ERISA “investment advice fiduciary.” Summarizing (and oversimplifying somewhat), under the new rule a person is an investment advice fiduciary if, for a fee or other compensation, she makes a recommendation to a plan, plan fiduciary, participant or IRA owner about an investment, rollover or distribution, or about investment management (e.g., portfolio composition), and either (1) she acknowledges she is a fiduciary, (2) the advice is pursuant to an “understanding” that it is based on the recipient’s particular needs, or (3) she directs advice about a particular investment to specific recipient.
Certain persons are not advice fiduciaries, because what they do either does not constitute a “recommendation” or is explicitly excluded under the regulation:
Platform providers who market a generic platform from which the plan fiduciary may select or monitor investment alternatives.
Persons producing general communications, e.g., general circulation newsletters.
Persons providing investment education, including for plans (but not IRAs), education that identifies specific investment alternatives as long as other, similar alternatives are identified.
Persons providing advice in an arm’s length transaction to “institutional fiduciaries.” Institutional fiduciaries include banks, insurance carriers, 1940 Act- and state-registered investment advisers, registered broker-dealers and independent fiduciaries that manage total assets of at least $50 million. (This is the institutional “seller’s exception.”)
Certain sponsor employees – plan committee staff and employees who provide casual advice to a colleague.
Persons providing asset valuations
The new rule also re-defines what is “education” (and therefore not advice). Under the new rule (and unlike the “old” education rules under Interpretive Bulletin 96-1), recommendations with respect to distributions do generally constitute advice. (We discuss the new education rules in detail in our article Investment education under the Conflict of Interest regulation.)
In connection with the new rule, DOL proposed several exemptions, the most important of which is the Best Interest Contract (BIC) Exemption. In response to President Trump’s memorandum, DOL (in its April 7, 2017, regulation) determined that it should apply these exemptions on a modified basis during the period June 9, 2017-January 1, 2018. During that period, only the “impartial conduct standards” under the exemptions will apply. As DOL explained:
Beginning on June 9, 2017 [and until January 1, 2018], advisers will be subject to the prohibited transaction rules and will generally be required to (1) make recommendations that are in their client’s best interest …, (2) avoid misleading statements, and (3) charge no more than reasonable compensation for their services.
Much has been said about the effect of the new rule on providers, but sponsors will also be significantly affected.
As we discussed in our article Monitoring advice providers under the new Conflict of Interest regulation, probably the biggest challenge for sponsors will be reviewing compliance with the new rule (and related exemptions) by provider-fiduciaries. In this regard, the biggest issues are likely to be: (1) determining the status (fiduciary or non-fiduciary) of persons interacting directly with participants, including, e.g., call center operators and persons (including sponsor officials) providing participant education; and (2) with respect to those persons who are fiduciaries, monitoring their compliance with the fiduciary standards generally and with applicable exemptions.
Some sponsors may consider avoiding the challenges presented by issue (2) (monitoring compliance) by prohibiting (e.g., via contract) the provider from taking actions that might trigger fiduciary status (issue (1)), e.g., by prohibiting the making of recommendations with respect to investments or distributions.
One issue that is still unresolved is the treatment of sponsor employees whose job includes discussing the plan or plan investments or distributions with participants.
It appears that, e.g., an employee who casually makes recommendations to another will not be a fiduciary so long as he is not paid for doing so. What remains unclear is whether an employee who is paid to talk about the plan could make a recommendation without triggering fiduciary status.
This issue has come up, particularly, with respect to recommendations that most regard as “innocent,” e.g., recommendations that a participant increase contributions to take full advantage of a plan match. In that regard, the DOL has indicated that an individual (including a sponsor employee who is paid to talk about the plan) may make informational statements without triggering fiduciary status. Thus, in recent guidance DOL stated that the following would not be fiduciary investment advice:
An email communication sent to a plan participant telling him his current contribution rate, explaining that if he increased his contribution rate his projected retirement savings could increase and inviting him to contact a call center for assistance if he wants to increase his contribution rate.
This guidance is, of course, in line with the rules under IB 96-1 (recapitulated in the new regulation) that the mere provision of information is not fiduciary “advice.” It says nothing about the status of a statement such as: “You should increase your contribution rate to take full advantage of the match.” Or “It’s a bad idea to invest in more than one target date fund.”
Groups representing sponsors are still hoping for clarification on this issue.
Three pieces of legislation have been introduced in Congress that would fundamentally change the fiduciary rule. Summarizing (and oversimplifying somewhat):
On June 8, 2017, the House passed the Financial Choice Act. That bill includes a section repealing the fiduciary rule and prohibiting DOL from prescribing any new rule until “60 days after the Securities and Exchange Commission issues a final rule relating to standards of conduct for brokers and dealers.”
Also on June 8, 2017, Senator Isakson (R-GA) introduced the Affordable Retirement Advice Protection Act. Unlike the Financial Choice Act, which simply repeals the fiduciary rule, the Affordable Retirement Advice Protection Act provides a new and comprehensive set of rules for the provision of advice. It includes a new definition of advice that uses DOL’s expanded concept of a “recommendation,” e.g., picking up recommendations with respect to distributions. But (unlike the new rule, and like DOL’s “old” 1976 advice rule) it makes fiduciary status (generally and with some limitations) contingent on mutual agreement. Finally, it provides a more relaxed prohibited transaction exemption for persons who are advice fiduciaries.
Similar (although not identical) legislation has been introduced in the House. The House legislation also incudes a repeal of the DOL regulation and amendments to related provisions of the Internal Revenue Code.
None of these bills has any Democratic sponsors, and the Financial Choice Act passed the House without any Democratic support. Given the need in the Senate for 60 votes to force a vote on a bill (except in the case of budget reconciliation legislation), it’s unlikely that any of these bills will become law in the current Congress. They do, however, give some idea of the alternatives to the DOL fiduciary rule that its opponents are willing to consider.
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We will continue to follow these issues.