Regulations Made by DOL to Broaden ERISA Fiduciary Definition
June 24, 2016
The DOL amended the fiduciary definition
The Department of Labor recently issued its final regulations to alter the definition of a fiduciary under ERISA effective Apr. 10, 2017. These “conflict of interest” rules will expand ERISA protections for participants by broadening the personnel treated as fiduciaries which render fee-based investment advice.
With the new rules, the DOL intends to redefine fiduciary investment advice by requiring advisers for ERISA-governed retirement plans and IRAs to act within the definition of ERISA. This move was also intended to summarize the code of conduct for investment advisers specific to provisions for ERISA plan sponsors.
While the final regulations are geared toward investment advisers, they will significantly affect plan sponsors themselves.
The new ERISA fiduciary definition
Advisers are categorized as fiduciaries rendering investment advice when they offer suggestions to plans, plan fiduciaries, participants, beneficiaries and IRA account owners. According to the National Law Review, these recommendations from advisers are deemed investment advice when there are specific suggestions to engage or avoid certain investments. When investment communication is tailored to an individual, it is more likely to be considered a recommendation – particularly in exchange for fee or other forms of direct or indirect compensation.
When investment advisers are not considered fiduciaries
Some of these exclusions include employees of plan sponsors, plan fiduciaries, employee benefit plans, affiliates or employee organizations. This is true so long as these entities receive normal compensation for work performed.
Any programs that do not have an investment component, such as health and welfare plans, are also exempt.
The same applies for platforms of investment alternatives. These are exempt so long as advisers present these platforms to plan fiduciaries as impartial suggestions or explain that the advice is not intended as investment recommendations.
Asset valuations are also exempt from the fiduciary definition under the new rules. However, the DOL has stated that it will seek to address asset valuation issues with further regulations.
The best interest contract exemption
While the regulations will be effective Apr. 10, 2017, advisers will have until Jan. 1, 2018 to ensure compliance with the “best interest contract exemption”. This provision enables advisers to provide investment recommendations as long as they give “advice in the client’s best interest, charge only reasonable compensation, and avoid misleading statements about fees and conflicts of interest.”
The exemption requires advisers to disclose all conflicts of interest and remove any financial incentives for investment advice that may not be in the client’s best interest.