Yesterday, after months of intensive review and feedback from industry experts and other stakeholders, the Department of Labor finalized the controversial regulations defining the term “fiduciary” under ERISA and providing new rules regarding investment advice.

The final “Fiduciary Rule” will impact service providers with respect to qualified plans, IRAs and health savings accounts (HSAs). While the final rule is substantially similar to the proposed rule, there are a number of important changes, including expanding the rule’s education exemption and liberalizing the Best Interest Contract exemption.

According to the White House’s press release on the Fiduciary Rule, the President believes the rule “will ensure retirement savers get advice in their best interest, while minimizing the compliance burden on the many advisers who already put their clients’ best interest first.”

The Fiduciary Rule becomes effective in phases, with many provisions becoming effective on April 10, 2017. Plan sponsors should be prepared to work with service providers to renegotiate the terms of their contracts, especially regarding the provision of investment education and distribution option consulting.

Definition of “Fiduciary”

The final Fiduciary Rule retains the proposed rule’s test for determining fiduciary status with few major modifications. Under the Fiduciary Rule, a person is a fiduciary if he or she provides advice in exchange for compensation regarding:

• Buying, holding, selling or exchanging securities or other property; or

• Managing securities, including recommendations with respect to rollovers from the plan and selection of investment advisers;

And either:

• Represents or acknowledges that he or she is a fiduciary;
• Renders the advice under an agreement, arrangement or understanding that the advice is based on the recipient’s particular needs; or
• Provides individualized or specifically directed advice to consider in making an investment decision (including rollovers from an ERISA plan or IRA).

The proposed Fiduciary Rule included guidance regarding when appraisals and valuations gave rise to fiduciary status. In response to commentary, the DOL reserved all appraisal issues for future rulemaking.

In light of this new test, plan sponsors may see service providers make a number of changes to the types of advice they offer, including:

• Limiting the types of advice offered;
• Disclaiming that they offer individualized or specifically directed advice; or
• Attempting to fit into new exemptions, including those described below.

Plan sponsors can also expect to see service providers who offer advice on an irregular basis change the terms of their service agreements, because they are more likely to be deemed a fiduciary under the new Fiduciary Rule.

Exemptions

The final Fiduciary Rule generally retains the exemptions set forth in the proposed rule. These exemptions cover, in part:

• Advisors selling investment products to financially sophisticated counterparties in connection with arm’s-length transactions (including plan sponsors with greater than $50 million (reduced from $100 million in the proposed rule) in plan assets and various regulated individuals and entities);
• Plan sponsor employees offering advice in their capacity as employees;
• Recordkeepers who merely present available investment options to plan sponsors;
• Service providers who provide responses to replacement fund searches based on objective criteria; and

• Providing education.

Additionally, the Fiduciary Rule allows service providers who do not fit into the above exemptions to rely on a Best Interest Contract exemption. Service providers may rely on this exemption to provide certain types of conflicted advice. For example, a service provider might use the Best Interest Contract exemption to provide advice to participants about IRA rollovers. In general, to use the Best Interest Contract exemption, a service provider must:

• Enter into a Best Interest Contract containing certain required provisions;
• Acknowledge their fiduciary status;
• Provide certain disclosures to the plan; and
• Adhere to certain standards of conduct in providing advice to participants.

Education

The DOL largely retained the exemption for providing education, but liberalized the exemption by allowing service providers to refer to designated investment options in some cases. With respect to the exemption for providing education, the DOL provides the following examples of “education”:

• Information or materials describing plan operations or providing information about the benefits of plan participation;
• Certain kinds of general financial, investment and retirement information;
• Asset allocations that provide certain required disclosures; and
• Interactive retirement calculators and other similar materials.

Under the proposed Fiduciary Rule, educational materials could not identify specific investment products. The final Fiduciary Rule generally allows asset allocation models and interactive investment materials to identify specific investment alternatives under ERISA governed plans if they:

• Are designated investment alternatives under the plan;
• Identify all other designated investment alternatives with similar risk and return characteristics, if any; and
• Are accompanied by certain disclosures.

However, in the IRA and HSA context, educational materials may not refer to specific investment alternatives.

Plan sponsors should expect to see additional disclosures, potentially directed at plan sponsors and their participants, from call centers and education service providers. Plan sponsors should also expect to see some service providers restructure their services to comply with the Best Interest Contract exemption.

Next Steps

The final Fiduciary Rule becomes effective in phases. Transitional rules allowing service providers to begin relying on the final rule take effect in June of 2016. Most of the Fiduciary Rule’s provisions are effective on April 10, 2017, with the full disclosure provisions and contract requirement for the Best Interest Contract exemption becoming effective January 1, 2018.

The Fiduciary Rule makes it clear that plan sponsors have an obligation to monitor how their service providers comply with the rule’s requirements. Plan sponsors should be prepared to conduct thorough due diligence on changes to their service providers’ offerings, service agreements and disclosures to demonstrate that they are meeting their fiduciary duty to protect participants from conflicted advice.

Additional Information

For help in determining how the Fiduciary Rule will affect your plan, please contact a member of the Kutak Rock Employee Benefits Practice Group.