On April 6, 2016, the Department of Labor released the final version of its highly anticipated fiduciary rule. The rule is the culmination of six years of study, commentary and revisions after it was originally proposed in 2010, withdrawn and then re-released in 2015.
The rule will impose a fiduciary standard of care on brokers and investment advisors who provide investment advice to retirement plan investors. Generally, a fiduciary must deal fairly with, and act in the best interests of, its client, avoid misrepresentations, receive only reasonable compensation and is prohibited from engaging in any conflict of interest transaction with that client, absent full disclosure of the conflict and advance client consent to the transaction.
The essence of the rule — to subject more retirement plan accounts advisers to the fiduciary standards of ERISA — remains unchanged, but the Department of Labor made several exemptions and modifications to ease the burden on advisers.
The final rule expands those who are considered a fiduciary to retirement accountholders, including employee benefit plan participants and IRA accountholders. A fiduciary now includes a person who provides certain specified types of “investment advice.”
“Investment advice” includes any “recommendation” regarding:
A “recommendation” is broadly defined as a communication in exchange for compensation that would reasonably be seen as a suggestion that the advisee take (or not take) a particular action. The more narrowly tailored the advice to a particular investor, the more likely the communication will be considered a recommendation. Specific educational asset allocation models and interactive investment materials, if provided to multiple plan participants and beneficiaries, are not considered recommendations. If the same materials are provided to individuals, they may be seen as recommendations. However, certain activities related to marketing, such as advertising available investment options, and hosting investment or retirement education seminars, specifically are not considered recommendations.
Providing investment advice will give also rise to a fiduciary duty when:
The new rule provides two important exemptions:
The Department of Labor made some important concessions in the final rule to allay concerns raised during the comment period, including:
If you would like more information about the new fiduciary rule, including a copy of the final rule or the “Frequently Asked Questions” disseminated by the DOL, please contact Dee Anne Sjögren or Patrick Paterson.