DOL Finalizes ERISA Fiduciary Rule

Author: Marta Moakley, XpertHR Legal Editor

April 12, 2016

The US Department of Labor (DOL) has released its Final Fiduciary Rule under the Employee Retirement Income Security Act (ERISA). The Final Rule streamlines many of the more burdensome aspects of the proposed rule and stresses the importance of eliminating any potential conflicts of interests with respect to ERISA fiduciaries.

The DOL has released a number of resources to inform employers regarding the new requirements.

Definition of Fiduciary

The Final Rule eliminates the existing five-part test for fiduciaries that was instituted in 1975, when regulations were first issued under ERISA. The revised definition of fiduciary also applies to the Internal Revenue Code (IRC) for purposes of individual retirement accounts (IRAs). Because the original five-part test does not adequately cover the many investment professionals, consultants and advisers in the current marketplace, the Final Rule changes the definition of adviser to include the following types of advice, either directly or indirectly:

  • A recommendation (i.e., a communication that would be reasonably viewed as a suggestion that the advice recipient engage in or refrain from a particular course of action) as to the advisability of acquiring, holding, disposing or exchanging securities or other investment properties; or
  • A recommendation as to the management of securities or other investment property, including recommendations on:
    • Investment policies or strategies;
    • Portfolio composition;
    • Selection of other persons to provide investment advice or management services;
    • Selection of investment account arrangement; or
    • Recommendations with respect to rollovers, transfers or distributions from a plan or IRA.

The Final Rule provides several examples of actions that do not constitute recommendations, including:

  • Marketing or making available to a plan fiduciary a platform of investment options, without regard to the individualized needs of a plan;
  • Providing selection and monitoring assistance in response to a request for information or proposal, providing objective financial data and comparisons with independent benchmarks; or
  • Identifying investment alternatives that meet objective criteria specified by the plan fiduciary.

The Final Rule also deems that a person making a recommendation provides investment advice if that person:

  • Represents or acknowledges that it is acting as a fiduciary within the meaning of ERISA or the IRC;
  • Renders the advice under a written or verbal agreement, arrangement or understanding that the advice is based on the particular needs of the advice recipient; or
  • Directs the advice to a specific advice recipient or recipients regarding the advisability of a particular investment or management decision with respect to securities or other investment property of the plan or IRA.

Activities Not Giving Rise to Fiduciary Relationship

Under the Final Rule, merely marketing one's services without making an investment recommendation does not rise to the level of fiduciary investment advice. In addition, subject to certain conditions, asset allocation models and interactive materials to identify specific investment products or alternatives may be shown without being considered fiduciary investment advice. Educational materials and general communications (e.g., conference presentations or newsletter content) are also excluded from the definition.

Employees of plan sponsors, affiliates, employee benefit plans, employee organizations or plan fiduciaries do not fulfill the definition of investment advice fiduciaries, if the employees receive no fee or other compensation in connection with any such recommendations beyond their normal compensation for work performed. This exclusion is particularly relevant to employees working in HR, payroll, accounting and financial departments who routinely develop reports and recommendations. As long as the employees meet certain conditions, HR-developed corporate employee communications regarding plan and distribution options will not be deemed investment advice under the Final Rule.

Exemptions Under the Final Rule

The Final Rule includes a Best Interest Contract Exemption (BIC or BICE), which provides an exception for common forms of compensation, such as commission and revenue sharing, if the fiduciary meets specific conditions intended to ensure that financial institutions mitigate conflicts of interests and provide advice that is in the best interest of their customers.

In addition, the Principal Transaction Exemption (PTE) permits investment advice fiduciaries to purchase or sell certain investments out of their own inventories.

Effective and Applicability Dates

The Final Rule becomes effective on June 7, 2016. However, in responding to concerns regarding the relatively short time period for implementation of the proposed rule, the DOL has extended the first phase of implementation to April 10, 2017. In addition, the following provisions affecting the BICE and the PTE will go into full effect on January 1, 2018:

  • Full disclosure provisions;
  • Policies and procedures requirements; and
  • Contract requirements.

The DOL reasons that the delayed implementation date will allow firms and advisers to benefit from the relevant exemptions without having to meet all of the exemptions' requirements for a limited time.

A separate rulemaking project will center on appraisals and employee stock ownership plans (ESOPs).