DOL Fiduciary Changes Overview
MISCELLANEOUS (June 2015)
The Department of Labor (DOL) oversees your ERISA retirement plan and service providers. The DOL has recently received much attention for proposing an updated regulation expanding the individuals who would be treated as retirement plan fiduciaries by virtue of them providing investment advice to your plan and participants. Below, we help you understand what the proposed regulation could mean to you, as a plan sponsor.
The Employee Retirement Income Security Act of 1974 (ERISA) defines who is a fiduciary to your retirement plan. There are a variety of ways that your plan service providers could be treated as fiduciaries under ERISA. For example, if you hire an investment manager who has the power to select, monitor and manage your plan’s or the participants’ investments, the investment manager is an ERISA fiduciary. The proposed rule does not impact investment managers.
At the heart of the DOL’s new guidance is an individual who gives your plan or participants “investment advice.” DOL regulations currently include a five-part test for determining when advice becomes fiduciary investment advice. Under this test, the advice must be:
- provided on a regular basis;
- the primary basis for the investment decision;
- individualized for the plan or participant;
- provided for a fee; and
- made based on a mutual understanding or agreement.
The DOL seeks to update its 40-year old guidance to change to a new test. In essence, the DOL has proposed a modified test that would eliminate the prior requirements that the advice be provided on a regular basis and that it be the primary basis for the investment decision. Thus, fiduciary investment advice includes certain advice for a fee either based on a mutual understanding of the parties that the advice is individualized to the recipient or where the service provider acknowledges fiduciary status. The DOL’s proposed change expands the type of retirement investment advice covered by the fiduciary rules.
The new guidance specifically carves-out certain categories of service providers or types of advice to retirement plans from being treated as ERISA fiduciaries or fiduciary investment advice. An example of some of these exceptions include:
- your employees: recommendations to a plan fiduciary by an employee of a plan sponsor where the employee only receives his or her normal salary;
- product providers: service providers that simply market or make available a platform of investments options from which a plan fiduciary may select investments for a participant-directed retirement plan; and
- advisors providing selection and monitoring assistance: service providers whose investment assistance is limited to identifying investment alternatives that meet objective criteria set by the retirement plan fiduciary and/or who provide the plan fiduciary with objective financial data and comparisons with independent benchmarks to enable the plan fiduciary to monitor its selected investments in connection with the retirement plan product provider.
Implications of the Proposed Regulation
It is important to understand that the DOL’s updated regulation is only proposed at this point. It is not yet a final rule applicable to your service providers. The proposed regulation is subject to public input and comments through July 21, 2015, public hearings after the comment period closes, a possible additional comment period and potential further DOL revisions. The new guidance does not require any immediate action on the part of plan sponsors. However, if the DOL finalized the updated regulation in its current form, plan sponsors might see some changes to how their service providers interact with their plan and participants in these ways:
Investment Platform and Services
As a plan sponsor, your access to service providers’ investment platforms and options should not change. Also, the proposed guidance does not eliminate your advisor’s ability to provide you and your participants investment education without being treated as a fiduciary investment advisor. Similarly, the proposed guidance does not restrict your advisor from providing you information on investment alternatives and information to assist you in monitoring those alternatives. As a result, you may not see any changes in the nature of services you are receiving from your service providers, including your advisor. The proposed regulations does not mandate a change.
It is possible, however, that some advisors who currently do not hold themselves out as fiduciaries today may elect to adjust their services. Some advisors may elect to expand their services from education to investment advice. In either case, you can expect to receive information from your advisor about the nature of his or her services once the new guidance is finalized.
The proposed guidance does not eliminate your advisor’s ability to receive commissions or revenue sharing from investments to compensate them for providing you services. Thus, it is possible that nothing related to the fees under your current service arrangement will change as a result of the new guidance. However, if your advisor is providing you investment recommendations, the new requirements mandate certain disclosures that your advisor must make to you about his or her services for the advisor to continue to receive commissions and similar compensation. In this case, your advisor must also provide you recommendations in the best interest of the plan.
It is possible that some advisors who provide investment recommendations will move to a flat or level fee structure as a result of the DOL’s changes. In either case, as with the nature of your advisor’s services, you can expect to receive information from your advisor in the future about the advisor’s compensation.
The DOL proposed rule continues to provide an exception from the fiduciary rule for general education provided by plan sponsors and advisors, including education on plan information, general retirement and investing information, hypothetical asset allocation models and interactive investment materials. The DOL proposed guidance clarifies the exception, however, explaining that plan sponsors and advisors may not meet the exception by recommending specific investments or investment managers. Plan sponsors and advisors should consider reviewing their participant education materials, especially including asset allocation models populated with investment choices, to avoid these references and being treated as a fiduciary if that is not the intent.
Rollovers and IRAs
A very significant change in the DOL’s new guidance relates to rollovers or distributions from a retirement plan and IRAs. Once the new rule is finalized, an advisor’s investment advice to an IRA owner is subject to the fiduciary rules. Today, this advice is not fiduciary investment advice.
Similarly, the DOL has changed its position on distribution-related advice. The proposed new guidance now provides that a recommendation to a plan participant to take a plan distribution is fiduciary investment advice. In fact, any recommendation regarding a plan or IRA distribution, whether through a rollover or otherwise, will be fiduciary investment advice.
Given the DOL’s expansion of the fiduciary rules to IRAs and the change in its position on rollover advice, plan advisors will likely review their services to participants. While the proposed regulation does not require an advisor to change his or her services, advisors who wish to continue to work with participants to provide guidance on their distribution needs may need to adjust how they receive compensation if the services rise beyond education to advice.
The impact of the DOL proposed guidance on your plan is not as significant as what might first appear. Plan sponsors will have access to the same types of services as exist today. Instead, the DOL’s new proposed guidance directly impacts how your service providers provide you with these services. We expect that advisors will evaluate their business models and determine whether to provide services in a fiduciary role once the DOL finalizes the new guidance toward the end of the year.
Regardless of what happens with the new rule, you can be assured that Mutual of Omaha Retirement Services monitors industry and governmental developments that impact your plan and the retirement marketplace. You can expect to receive timely, updated information from us when the DOL finalizes its fiduciary investment advice regulation later in the year.