Newslink: Retirement

August 2016
New Department of Labor Fiduciary Rules
Part 1, Fiduciary Definition


On April 8, 2016, the Department of Labor (DOL) published final regulations expanding the definition of “fiduciary” of an ERISA employee benefit plan to individuals giving investment advice or recommendations to a plan or its participants/beneficiaries for a fee. The new rules apply to Individual Retirement Accounts (IRAs), as well. On the same date, the DOL also published other rules related to the fiduciary rules, including a prohibited transaction exemption for those entities who meet the new definition of fiduciary.

The DOL has struggled with these controversial rules for several years dating back to 2009, and has finally produced more than 1,000 pages of guidance in an effort, they claim, to better protect retirement investors. The intent of the regulations and other published guidance is to require that those who provide retirement investment advice to plans, fiduciaries, participants and IRAs, must “put their clients’ best interest before their own profits.” These newly defined fiduciaries must avoid payments for services that create conflicts of interest. Fiduciaries defined under these rules must also comply with rules that will eliminate a prohibited transaction when the fiduciary is paid for investment advice services.

TRI-AD presented a high-level review of the rules in our Retirement Legislative Update web seminar offered on May 25, 2016. If you are interested in viewing the recording of presentation, click here.

What is the effective date that these new rules go into effect?

The regulations are effective April 10, 2017. Everyone affected by the rules has ample time to evaluate the rules as they relate to their services. The prohibited transaction exemption rules are effective January 1, 2018, with some transition rules effective between April 10, 2017 and January 1, 2018.

What do plan sponsors need to know?

The onus of compliance is on individuals/entities that will be considered investment advice fiduciaries under the new rules. Plan sponsors should have an understanding of the requirements to ensure their providers will address all fiduciary matters so there are no prohibited transactions between the plan/IRA and a fiduciary that does not comply. Sponsors should require service providers give them a detail of their analysis of fiduciary status as it relates to the services being provided.

Below is a brief recap of the fiduciary definition. We will be providing an additional article soon about the prohibited transaction exemption rules.

Which plans do the new rules apply to?

  • ERISA Plans (including ERISA 403(b) plans)
  • Traditional IRA’s and Individual Retirement Annuities
  • Roth IRA’s
  • Health Savings Accounts
  • Archer Medical Savings Accounts
  • Coverdell Education Savings Accounts

Who is now considered a fiduciary under these new rules?

A person or entity will be considered rendering investment advice and therefore subject to these new rules if they provide the following information to a plan, plan fiduciary, plan participant or beneficiary, IRA or IRA owner for a direct or indirect fee or other type of compensation:

  • Recommendations 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 property are rolled over, transferred, or distributed from the plan or IRA;
  • Recommendations as to the management of securities or other investment property, including investment policies or strategies, portfolio composition, selection of other persons to provide advice or management services, or selection of account arrangements (brokerage vs. advisory); or
  • Recommendations with respect to rollovers, transfers or distributions from a plan or IRA, including recommendations on the amount, type of payment, and the destination of the distribution.

Without going into too much detail, a recommendation generally means a communication that would reasonably be viewed as a suggestion for an advice recipient (the person receiving the advice) to engage in or refrain from taking a particular course of action with respect to investments.

In addition, in order for a person or entity to be a fiduciary, they must:

  • Acknowledge they are acting as a fiduciary;
  • Render advice pursuant to an agreement (written or verbal) with the understanding that the advice is based on the particular investment needs of the advice recipient; or
  • Advise about a particular investment or management decision with respect to securities or other investment property of the plan or IRA.

Who is impacted by these rules?

The following service providers are most impacted by these new rules:

  • Broker/dealers
  • Insurance companies
  • Registered Investment Advisors
  • Recordkeepers – based on services provided
  • Third Party Administrators – very limited exposure, if any

What should plan sponsors do?

Plan sponsors should check with their plan providers to inquire about the impact of these new rules on the services/fees they provide to their plan(s). Most providers are still evaluating the rules and may not have answers yet. Also, the DOL has promised to provide additional guidance for many unanswered questions about the new rules. Hopefully, more information will be provided soon. They recently provided additional guidance on the prohibited transaction exemption which we will address in the next article.

Watch for our next article about the prohibited transaction exemption, coming soon!

DOL Fact Sheet:

Final DOL Regulations: