DOL finalizs re-definition of ERISA “investment advice fiduciary”

DOL finalizs re-definition of ERISA "investment advice fiduciary"

On April 6, 2016, the Department of Labor finalized its regulation re-defining who is an “investment advice fiduciary” under ERISA. In connection with that regulation it also finalized two new prohibited transaction exemptions (PTEs) and amendments (and revocations) of certain prior PTEs. With this regulation package, DOL is expanding those situations in which giving investment advice to an employee benefit plan, plan fiduciary, participant, or IRA owner makes the advice-giver an ERISA fiduciary (“investment advice fiduciary”). It significantly changes what sorts of advice may be given, to whom and in what circumstances.

The new rules will probably have their greatest effect on brokers, mutual funds, and certain other financial services providers and on consultants and third party administrators. They do not just cover 401(k) plans – they cover any employee benefit plan or IRA. Arguably, their most drastic effect will be on IRAs and persons advising IRA-owners.

Significance for plan sponsors

Our focus, however, will be exclusively on the effect the new rules have on retirement plan sponsors. For plan sponsors, the new rules matter, first, because sponsors are, in effect, consumers of advice. Either directly, when, for instance, a consultant advises them about which funds to put in a fund menu. Or indirectly, on behalf of participants, when, for instance, they retain persons (educators, investment advisers or even call center operators) to advise their participants.

The new rules also matter, second, because sponsors and sponsor staff may be directly affected, that is, they may themselves in some cases be investment advice fiduciaries.

For retirement plan sponsors, three areas are critical: (1) advice received with respect to the selection and monitoring of investments and fund menu investment options; (2) advice to (and education for) participants about plan investments; and (3) advice to participants about plan distributions/rollovers.

In this article we are going to review the new rules generally. We are also posting today an article on the Best Interest Contract Exemption. We will be shortly providing an article discussing the effect of the new rules on investment education.

We begin with a very brief review of current rules. (We note that, under the regulation as finalized, those “current rules” will continue to apply for another year – until April 2017.)

Current rules

Under current rules, it was fairly hard to become an investment advice fiduciary, that is, to be an ERISA fiduciary merely because you have given a plan or plan participant investment advice. Generally, to trigger fiduciary status, you have to:

  1. Render advice as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing or selling securities or other property

  2. on a regular basis

  3. pursuant to a mutual agreement, arrangement or understanding, with the plan or a plan fiduciary that

  4. the advice will serve as a primary basis for investment decisions with respect to plan assets, and that

  5. the advice will be individualized based on the particular needs of the plan.

Under these rules an adviser generally can prevent fiduciary status by, for instance, simply disclaiming agreement that her advice will serve as a primary basis for investment decisions.

New DOL regulation – who is an investment advice fiduciary?

Here’s a short and somewhat oversimplified version:

A person is an investment advice fiduciary if 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.

The new definition in detail

Here’s the longer version: A person is treated as rendering “investment advice” if, for a fee or other compensation, she provides to a plan, plan fiduciary, participant or IRA owner either:

Advice as to investment. “A recommendation as to 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 after the securities or other investment property are rolled over, transferred, or distributed from the plan or IRA.”

Advice as to investment management. “A recommendation as to the management of securities or other investment property, including, among other things, recommendations on investment policies or strategies, portfolio composition, selection of other persons to provide investment advice or investment management services, selection of investment account arrangements (e.g., brokerage versus advisory); or recommendations with respect to rollovers, transfers, or distributions from a plan or IRA, including whether, in what amount, in what form, and to what destination such a rollover, transfer, or distribution should be made.”

Recommendations that trigger fiduciary status

A “recommendation” is a communication that “would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action.” Providing that advice makes the adviser a fiduciary where the recommendation is made by a person who either:

Represents or acknowledges he is a fiduciary.

Renders the advice pursuant to a written or verbal agreement, arrangement, or understanding that the advice is based on the particular investment needs of the recipient.

Directs the advice to a specific recipient regarding the advisability of a particular investment or management decision.

What’s not a recommendation

Certain things are not “recommendations” and therefore do not trigger fiduciary status, including:

Platform providers. Marketing or making available to an independent plan fiduciary (but not an IRA owner), without regard to individualized needs, a platform from which the plan fiduciary may select or monitor investment alternatives, provided the platform provider discloses in writing that he is not providing impartial investment advice or giving advice in a fiduciary capacity.

General communications. General circulation newsletters, publicly broadcast talk shows, etc.

Investment education. We will be providing a more detailed treatment of participant investment education rules under the new regulation. Briefly: as under the proposal, the final regulation supersedes current rules on investment education (Interpretive Bulletin 96-1). What constitutes “non-fiduciary” investment education is now described in the final regulation. Generally, the final regulation tracks IB 96-1 with the following exceptions: (1) The final regulation applies to IRAs as well as ERISA plans. (2) It applies to advice with respect to distributions (and not just “investment” as such). And, with respect to IRAs, permitted “education” may not identify any specific investment alternative or distribution option.

In a change from the proposal, with respect to a plan, e.g., in education targeted at plan participants, an asset allocation model may, without triggering fiduciary status, identify a specific investment alternative if it is a designated investment alternative subject to oversight by an independent plan fiduciary. This rule applies so long as the model: (1) identifies all other designated investment alternatives available under the plan that have similar risk and return characteristics, if any; and (2) is accompanied by a statement indicating that those other designated investment alternatives have similar risk and return characteristics and identifying where information on those investment alternatives may be obtained. “Interactive investment materials” (e.g., a software program) may also identify a specific investment alternative or distribution option, subject to similar rules. These rules do not apply to IRAs, for which identification of specific alternatives will trigger fiduciary status.


In addition, certain transactions/relationships are, under the final regulation, excluded from the definition of “investment advice fiduciary” (under the proposed regulation these were styled “carve outs”).

Arm’s length transactions with independent fiduciaries who have financial expertise (aka the “seller’s exception”). In an arm’s length transaction, investment advice fiduciary status does not apply to advice to a fiduciary of a plan or IRA who is independent of the adviser if, prior to entering into the transaction:

The adviser knows or reasonably believes that the independent fiduciary is: a bank; an insurance carrier; a 1940 Act investment adviser or state-registered investment adviser; a registered broker-dealer; or an independent fiduciary that holds, or has under management or control, total assets of at least $50 million. (This is, in effect, the definition of an “institutional fiduciary.” It is much broader than the proposal – indeed, it’s even available with respect to an IRA provided the fiduciary receiving the advice is independent and meets one of the “institutional” criteria (e.g., is a registered broker-dealer).)

The adviser reasonably believes that the independent fiduciary is capable of evaluating investment risks independently.

The adviser fairly informs the independent fiduciary (i) that he is not undertaking to provide impartial investment advice, or to give advice in a fiduciary capacity and (ii) of the existence and nature of his financial interests in the transaction.

The adviser reasonably believes that the independent fiduciary is a fiduciary with respect to the transaction and is responsible for exercising independent judgment in evaluating it.

The adviser does not receive compensation from the plan (or plan fiduciary, etc.) for his advice.

A Best Interest Contract Exemption (BICE) has been adopted to provide relief (where certain conditions are met) from the prohibited transaction rules that would apply to investment advisers who receive “conflicted payments” where the advice recipient is not an “institutional fiduciary.” We discuss the BICE in a separate article posted today.

Certain swaps transactions. Investment advice fiduciary status does not apply to advice to a plan by a person who is a swap dealer, security-based swap dealer, major swap participant, major security-based swap participant, or a swap clearing firm in connection with a swap or security-based swap, if certain conditions are met.

Sponsor employees. Investment advice fiduciary status does not apply to advice given by a sponsor employee: (1) to a plan fiduciary or sponsor employee provided she receives no compensation (beyond the employee’s normal compensation) for work performed for the employer; or (2) to another employee/plan participant (except where her job responsibilities involve the provision of investment advice). In English, these exceptions generally cover advice by, e.g., investment committee staff and casual advice by, e.g., a human resources employee to a colleague about plan investments.

Valuations. While valuations had, under the proposal, been included in the definition of investment advice, in the final rule they are not. DOL, in the preamble to regulation, stated: “After carefully reviewing the comments, the Department has concluded that the issues related to valuations are more appropriately addressed in a separate regulatory initiative.”

“Hire me” exception

In the final regulation, DOL reformulated its definition of “advice as to investment management” (quoted in full above) to limit it to recommendations of the “selection of other persons to provide investment advice or investment management services” (emphasis added). In the preamble to the final regulation DOL explained that this change was made to make it clear that a person (e.g., an investment adviser) could recommend that a plan or IRA owner “hire me” without triggering investment advise fiduciary status. On the other hand, a recommendation that a plan or IRA hire someone else (“other persons”) as an investment adviser would trigger investment advice fiduciary status. And if the “hire me” recommendation included “a recommendation on how to invest or manage plan or IRA assets,” the latter recommendation might trigger fiduciary status.

Effective date/applicability date

The new regulation is effective in 60 days but the does not “apply” until April 10, 2017. So sponsors and providers have a year to bring their practices into compliance.

* * *

As we said at the beginning, the new regulation and the rest of the regulation package significantly broaden who is an investment advice fiduciary. Provided certain conditions are met, advisers to institutional advice fiduciaries (e.g., fiduciaries of larger plans) generally get a pass. Advice to plan participants, however, will be subject to the new rules – that is, the adviser will generally be a fiduciary.

Advice as to in-plan asset allocation may come within the exception for investment education. And asset allocation outcomes may also be improved by the use of defaults (e.g., to a target date fund).

The significant participant advice problem for plan sponsors will be: who will advise the participant on termination of employment? Critically, who will coach terminating participants on the wisdom of rollovers or of leaving their retirement assets in the qualified plan system? We will have to wait to see if advisers emerge to respond to this need under DOL’s new rules.

With respect to sponsor employees, the final regulation generally improves the language in the proposal, exempting advice by staff to plan fiduciaries and the casual advice that one employee might give another.

We will continue to follow the issues raised by the new rules.