On April 14, 2015, the Department of Labor (DOL) reissued a proposed rule that would update the definition of “fiduciary” under the Employee Retirement Income Security Act of 1974 (ERISA) for parties giving investment advice to employee benefit plans, their participants, or beneficiaries. This proposal would broaden the interpretation of ERISA and apply its standard of care to more assets and individuals in America’s retirement system, including those providing services to individual retirement accounts (IRAs).
The Conflicts of Interest Proposed Rule updates the DOL's October 2010 proposal that met great opposition and criticism for its overreach and lack of economic impact analysis. Since retracting its 2010 proposal, the DOL has conducted further research and reshaped the proposed rule.
A few of the major tenets and observations of the reissued proposal include:
- Replacement of the 1974 definition of who is a fiduciary and the “5-part test” for fiduciary status with a new approach that shifts the definition from title to role in dispensing advice, regardless of contract language.
- Removal of the requirement that advice be provided on a regular basis. Rather, any incidence of advice (i.e. a one-time project) would invoke fiduciary status.
- The updated definition would expand the group considered fiduciaries under ERISA to include many brokers and advisors previously not required to acknowledge fiduciary status.
- Anyone rendering rollover advice or investment recommendations to plan sponsors, participants, or IRA accountholders would be an ERISA fiduciary.
- In becoming ERISA fiduciaries, the new standard would require financial professionals rendering investment advice to put their clients’ best interests first. It would also trigger prohibited transaction rules and excise taxes if appropriate compliance procedures were not in place to receive proposed exemptions.
- The proposed rule reiterates that education is not advice. The regulation, if finalized, would replace the DOL's long-relied-upon Interpretive Bulletin 96-1. It would prohibit education materials from including advice or recommendation of specific investment products, investment managers, or touting the investment merits of specific securities.
While this proposed rule would impact the retirement advice landscape for some plan sponsors, the most meaningful change would be for the $7 trillion of IRA accountholders and those servicing them. CAPTRUST favors applying a higher fiduciary standard to assets in America’s retirement system as long as it does not lead to restricting investors’ access to advice. Upon our first read of the proposal, we do not think that will be the case.
CAPTRUST has delivered advice services to plan sponsors and participants for over 25 years in a fiduciary capacity. The proposed rule will allow our clients and their employees to continue to enjoy those services, while applying the highest fiduciary standards and expanding transparency and disclosure for a wider variety of investors.
This proposal is subject to a 75-day comment period and a public discussion after which the DOL will issue a final rule. Given President Obama's focus on this initiative, we expect the administration (including the DOL) to push for a final rule to be effective before the president’s second term ends.
We will keep you apprised as we learn more and as we draw conclusions from our analysis of the proposal. Should you have questions about the proposed rule, please reach out to your CAPTRUST advisor. If you would like to read the entire release with supporting information, you can find it here.