Employee Benefit Plans: The 411

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

DOL Fiduciary Rule

The Department of Labor (“DOL”) has been working on revisions to the current “Fiduciary” Conflict of Interest Rule for multiple years but on April 8, 2016, the DOL’s final rule was posted to the Federal Register which is effective June 7, 2016 and applicable beginning April 10, 2017.

The rule now defines who is a “fiduciary” for separate instances:

  • An employee benefit plan under the Employee Retirement Income Security Act of 1974 (“ERISA”)
  • A plan (including an individual retirement account (“IRA”)) under the Internal Revenue Code of 1986 (“Code”).

The final rule amends the regulatory definition of fiduciary investment advice in 29CFR 2510.3-21 to replace the prior restrictive five-part test with a new definition that better mirrors the language in ERISA and the Code. The final rule provides that a person who renders investment advice if they provide for a fee or other compensation, director or indirect, certain categories or types of advice including:

  • 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.
  • 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, distributions, or transfers 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.
  • Excluded from the new rule in providing general investment education on retirement saving and “order-taking” whereby a broker is simply executing a buy or sell order without any recommendation.

While this rule change will impact advisers, the DOL sought to preserve business models for delivery of investment advice by publishing new exemptions from ERISA’s prohibited transaction rules that would permit firms to continue to receive many common types of fees, as long as they are willing to adhere to applicable standards aimed at ensuring that their advice is impartial and in the best interest of their customers. The DOL is also publishing exemptions that accommodate a wide range of current types of compensation practices, while minimizing the harmful impact of conflicts of interest on the quality of advice.

Overall, the final rules will likely result in structural changes for many financial service companies and broker-dealers. In addition, it is likely that many insurance companies that offer investment services could implement changes to their structure and business models. Look for future blog posts that discuss the new DOL exemptions (84-24 and the Best Interest Contract Exemption) and other impacts of the new rule.

By Kevin C. Bach, CPA, CVA