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DOL Releases Long-Awaited Fiduciary Rule

Earlier today, the Department of Labor (DOL) released the final version of its long-awaited regulation defining who is a fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA). The “conflict of interest rule”—as the DOL branded it—both changes the definition of who is an ERISA fiduciary and broadens the application of ERISA fiduciary standards to individual retirement accounts (IRAs), as defined under the Internal Revenue Code of 1986. 

No doubt you have already seen a fair amount of press coverage on the rule’s release and, given its significance to the financial services industry, you should expect more. Rather than rehash the provisions of the rule, this E.Brief will focus on what we believe you need to know as a plan sponsor and offer some useful resources if you’re interested in digging deeper.

As your plan advisor, CAPTRUST has always served in a fiduciary capacity when advising on your plan investments or when talking with your employees. We have acknowledged this fiduciary status in our contract. Throughout much of 2015—after the DOL released its proposed rule—we played an active role in the regulatory rule-making process on your behalf, including meetings between senior members of our firm and the DOL, Treasury, and the President’s Council of Economic Advisors. In these meetings, we fully supported best interest and fiduciary standards for investment advice rendered. We also expressed to the regulators and administration that we thought it would be unwise to water down fiduciary standards or introduce rules that are unintentionally punitive to American workers and their retirement savings.

The following is our first take on what we think you need to know:

  • The rule will be phased in starting in April 2017, with a full implementation deadline of January 1, 2018.
  • The rule extends ERISA fiduciary status to providers of advice to IRA owners (and their beneficiaries). While this does not have a direct impact on you as a plan sponsor, it is worth noting.
  • Recommendations related to rollovers, transfers, or distributions from a plan are now considered “covered investment advice,” which will subject the provider of this advice to fiduciary status if direct or indirect compensation is received.
  • The rule provides for several exemptions from prohibited transactions, the most meaningful of which is the “best interest contract exemption.” This exemption provides a way for parties with inherent conflicts of interest to enter into a contract within which, among other things, they commit to providing advice in the best interest of the plan, participant, or IRA owner. This will allow them to receive compensation that would otherwise be a prohibited transaction.
  • While the impact of the two points immediately above is not yet known, presumably, this will impact many recordkeepers and their guidance or education services previously delivered as non-fiduciary services. We have already seen communication from one recordkeeper indicating its willingness to accept “fiduciary responsibility for some of our current activities that are treated today as non-fiduciary education or guidance.” We will be following this issue closely and would be concerned about an environment where plan participants (and sponsors) must differentiate between classes of fiduciaries—those with conflicts of interest and those without.

We will continue to digest the rule and look forward to more robust discussions with you. In our follow-up communications, we will work to ensure that you understand the following takeaways from the rule:

  • What makes someone a fiduciary under the new rule.
  • What is considered covered investment advice under the new rule.
  • What is the best interest contract and how it may be used with your employees.
  • What you may want to require from service providers with inherent conflicts of interest that may interact with participants in your plan.
  • How financial institutions can work within the prohibited transaction exemptions identified in the new regulation, and what this means to you as a plan fiduciary.
  • Identifying what fiduciaries of financial institutions must provide to employees, including how they will document that they have acted in a person’s best interest.
  • Ultimately, whether we recommend any changes for compliance with the new rule.

As always, if you have questions, please let us know. Thank you for your continued trust.

Additional resources:

  • The final version of the regulation is available here.
  • A chart listing the changes made to the 2015 fiduciary proposal is online here.
  • A consumer-focused list of FAQs is available here.
  • The DOL’s fact sheet on the regulation is here.
  • The White House press release on the topic is here.