The Department of Labor (DOL) published final rules on April 8, 2016, that define who is a fiduciary of an ERISA employee benefit plan as a result of giving investment advice to a plan or its participants or beneficiaries.
The purpose of the final rules is to protect investors by requiring anyone who gives retirement “investment advice” to plans to comply with a “fiduciary” standard that “puts their clients’ best interest before their own profits.” The rules define investment advice as a recommendation to a plan, plan fiduciary, direct or indirect, on whether to buy, hold, sell, or exchange securities or other investments, including recommendations after investments are rolled over or distributed from a plan or IRA. In addition, investment advice includes recommendations regarding the management of investments, investment policies, portfolio composition, selection of individuals or firms to provide investment advice, selection of investment account arrangements, or recommendations regarding rollovers, transfers, or distributions from a plan or IRA. Education and general communications are not considered to be fiduciary investment advice.
Certain types of relationships must exist for recommendations to give rise to fiduciary investment advice responsibilities. These relationships include persons who, in exchange for a fee or other compensation:
- Acknowledge they are acting as a fiduciary
- Give advice based on the particular investment needs of a recipient pursuant to a written or verbal agreement, arrangement, or understanding
- Provide the advice to a specific recipient or recipients regarding a particular investment or management decision concerning securities or other investment vehicles of the plan or IRA
The final rules provide an exemption referred to as the “Best Interest Contract Exemption” (BICE). This provision allows investment advisors to continue to receive commission-based compensation as long as specific conditions are met. To meet the conditions, a financial institution must:
- Acknowledge it and its advisors are a fiduciary
- Comply with basic standards of impartial conduct
- Have policies and procedures designed to mitigate harmful conflicts of interest and disclose basic information about their conflicts of interest and cost of advice
Although the effective date of the regulations is June 7, 2016, compliance with the final rules is not required until the “applicability date,” which is April 10, 2017. The DOL explained that “in light of the importance of the final rule’s changes, an applicability date of one year after publication of the final rule is appropriate and gives adequate time for plans and their affected financial services and other service providers to adjust to the change from non-fiduciary to fiduciary status.”
If your business provides retirement benefits, we recommend that you discuss the rules with your administrator, broker, and others providing services to the plan and assess the impact of the rules on your current arrangements.
For a copy of the DOL’s Final Rules and Fact Sheet, go to our Resource page.