On January 13, 2017, the Department of Labor released two sets of FAQs in a second round of guidance on its Conflict of Interest rule. One set of FAQs is “Part II” of ongoing guidance on technical aspects of the rule as it affects providers and plan sponsors, and it will be the focus of this article. The other is a set of “Consumer” FAQs generally directed at plan participants and IRA owners.
Background – the issues that the Conflict of Interest rule presents for sponsors, generally
Many of the new Q&As focus on when a provider communication makes the provider a fiduciary under the rule. As we discuss in our article Monitoring advice providers under the new Conflict of Interest regulation, while the new Conflict of Interest rule doesn’t change the plan fiduciary’s legal obligation under ERISA to monitor the prudence of the appointment of a (fiduciary or non-fiduciary) service provider, the new requirements applicable to the provider will be stricter and more complicated. And reviewing the provider’s compliance with those stricter and more complicated requirements will make the plan fiduciary’s job tougher.
To take an obvious example: if the a communication turns a provider into a fiduciary and as a result the provider/fiduciary must now comply with the Best Interest Contract Exemption, then the sponsor-fiduciary will (to some extent, at least) generally have to monitor the provider/fiduciary’s compliance with that exemption.
Thus, to the extent the new FAQs clarify when and under what circumstances a provider communication triggers provider fiduciary status, they are (also) relevant to plan fiduciaries monitoring that provider-fiduciary.
Technical FAQs Part II
Many of the new FAQs cover/repeat guidance that was explained in more detail in the original rule and its explanatory preamble. Thus, the answer to Question 1 “Is every communication with a financial adviser about retirement accounts a fiduciary recommendation?” recites: (1) A summary of what constitutes a “recommendation” making a person an “adviser.” (2) The requirement that, to be a fiduciary, “[t]he adviser must also receive a ‘fee or other compensation’ for a communication to be investment advice covered under the Rule.” And (3), the sorts of communications (e.g., investment “education”) that do not constitute investment advice.
For a review of the new rules generally, see our articles discussing:
The new Conflict of Interest rule.
The new investment education rules.
In what follows we are not going to detail Q&As that simply recite guidance that was reasonably clear in the original rule and related materials. Instead we focus on some specific Q&As that may be of significance for plan sponsors:
Q&A 4: Recommending non-retirement investments may trigger fiduciary status. Q&A 4 states that an “adviser” who recommends a non-retirement investment to a person receiving a required minimum distribution from a 401(k) plan is giving “investment advice” covered by the new rule. The non-retirement investment in the example is a permanent life insurance product, but it could conceivably be anything that could be characterized as an “investment,” including, e.g., a second home. It’s fair to say that this interpretation is a surprise: it may make persons who don’t think of themselves as in the retirement investing business at all (e.g., a real estate broker recommending “investment” in a second home) ERISA fiduciaries.
Q5: Selecting an IRA vendor for mandatory cash-outs does not make the plan sponsor (or the vendor) a fiduciary. ERISA allows the cash-out (without the participant’s consent) of balances under $5,000. But if the balance is valued at more than $1,000, and the participant does not make an affirmative election (e.g., of a direct rollover or a cash distribution), the benefit must be transferred to an IRA or similar vehicle designated by the plan administrator. Q&A 5 makes it clear that that sort of arrangement, by itself, does not trigger ERISA’s fiduciary rules.
Q7. An adviser may charge a flat fee for providing investment advice without violating ERISA prohibited transaction rules provided it nets any investment related fees against the flat fee. DOL Advisory Opinion 97-15A generally allows an adviser to provide advice (e.g., to invest in a particular mutual fund) that results in the payment of a fee to the adviser (e.g., a 12b-1 or similar fee paid by the fund to the adviser based on that investment), where the adviser nets the fee against a flat, assets-based fee it charges for providing advice. Q&A 7 confirms that providers (and, implicitly, the sponsor fiduciaries who retain them) may continue to rely on Advisory Opinion 97-15A.
Q9/10. Recommendations to increase contributions to maximize the employer match generally do not constitute investment advice. Thus, a call center operator “may, without giving fiduciary advice, inform the participant that, based upon her current contribution percentage, she is not taking full advantage of the employer’s matching contribution, explain the company’s matching formula and calculate how much the participant would need to contribute in order to maximize the employer match.”
Q20/27. Corporate officers as independent fiduciaries/non-plan assets qualify for the $50 million test. Q&A 27 clarifies that a corporate officer such as a CFO who is also a 401(k) plan participant can qualify for the independent fiduciary exception if his job responsibilities include managing at least $50 million in assets. Q&A 20 clarifies that for purposes of the $50 million test “plan and non-plan assets and the assets of multiple plans and non-plan investors [may] be taken into account.” Thus, a CFO/plan fiduciary “with management or control of a company plan that has $42 million in total assets and who also is responsible for management of $10 million in cash and securities held in the company’s treasury department” would meet this test.
Q24. The independent fiduciary exception applies to a meeting with an (otherwise qualified) independent fiduciary, even if members of the plan’s fiduciary committee are also at the meeting. However: “[o]ngoing communications between the recordkeeper and the members of the plan’s fiduciary committee would not fall within the exception … unless the [independent fiduciary] participated in the particular subsequent communication and it was clear that the [independent fiduciary] continued to have responsibility to exercise independent judgment in making fiduciary recommendations with respect to the transaction that is the subject of the subsequent communication.”
Q28. A person may be “independent,” and thus qualify for the independent fiduciary exception, even though it is receiving, e.g., 12b-1 fees with respect to funds it selects for the plan’s fund menu if, with respect to those fees, it complies with the Best Interest Contract Exemption. Other “independence” requirements (e.g., the prohibition of any “agreement or understanding between the broker-dealer and the recordkeeper that would limit the broker-dealer’s ability to carry out its fiduciary duty to the plan”) would continue to apply.
Q29. Financial intermediaries may pay to/receive from each other fees with respect to investment advice without compromising eligibility for the independent fiduciary exception. Generally, a “person relying on the [independent fiduciary] exception cannot receive a fee … directly from the plan, plan fiduciary, plan participant or beneficiary, IRA or IRA owner, for the provision of investment advice (as opposed to fees or compensation for other services) in connection with the transaction.” But DOL “would not treat a fee paid between financial intermediaries as a direct fee for investment advice for purposes of the exception unless the fee is directly paid by the plan or IRA or with plan or IRA assets.”
The FAQs also clarify that:
Q6. An adviser is not liable for “investment decisions made by the client against the adviser’s recommendation.”
Q12. “Charging compensation for providing educational services does not change the nature of the communication into investment advice.”
Q15. To qualify for the investment education “exception,” asset allocation models need only include a plan’s “designated investment alternatives” – they do not have to include options available through a brokerage window.
Q17. Free-meal seminars are not “widely attended speeches or conferences” qualifying for the “general communications” exception to the new rule.
Q18. A recommendation to hire a non-fiduciary recordkeeper is not fiduciary advice.
Q32. “[T]he platform provider provision is available to persons who market or make available a platform, including a third party’s platform.”
Q33. A platform provider (e.g., a recordkeeper) may provide a list “of all of the investment alternatives available on the platform that meet the requirements of the plan’s investment policy statement” (emphasis added) without losing the protection of the platform provider exception.
We will continue to follow this issue.