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DOL Fiduciary Rule Explained

Earlier this spring, the Department of Labor (DOL) issued a much anticipated Final Rule (Final Rule) defining who is a “fiduciary” of an employee benefit plan under the Employee Retirement Income Security Act of 1974 (ERISA) and updated the conflict of interest rules applicable to such a “fiduciary.” The Final Rule is applicable to a “fiduciary” of a plan (including an Individual Retirement Account (IRA) under the Internal Revenue Code of 1986 (Code)).

Effective and Applicability Dates

The Final Rule became effective June 7, 2016, however, it is being phased in and is not fully applicable until April 10, 2017 (for the revised definition of fiduciary investment advice and new and amended exemptions) and January 1, 2018 (for the “best interest contract” and “principal transactions” exemptions).

This alert summarizes various high points of the Final Rule, however we intend to issue a follow-up alert outlining practical action items for plan sponsors.

Investment Advice

An individual falls within the Final Rule’s purview if he or she provides “investment advice” for a fee or other compensation (direct or indirect) and (i) represents or acknowledges that they are acting as a fiduciary within the meaning of ERISA or the Code; (ii) provides advice rendered pursuant to a written or verbal agreement, arrangement, or understanding that the advice is based on the particular investment needs of the recipient; or (iii) provides recommendations directed to a specific recipient or recipients regarding the advisability of a particular investment or management decision.

Under the Final Rule, “investment advice” is defined to include:

A recommendation as to the advisability of acquiring, holding, disposing of, exchanging, rolling over, transferring, or distributing securities or other investment property of the plan or IRA; or

A recommendation as to the management of securities or other investment property including, among other things, recommendations on investments (policies or strategies), portfolio composition, selection of investment account arrangements, selection of persons to provide investment advice or management services, or recommendations with respects to rollovers, transfers, or distributions.

Definition of “Recommendation”

A communication is considered a “recommendation” when its content, context, and presentation would reasonably be viewed as a suggestion that the recipient of that communication engage in or refrain from taking a particular course of action. The rule states that the standard is intended to be objective, not subjective. As a practical matter, the more client-specific the communication, the more likely it will be considered a “recommendation.”

The Final Rule sets forth the following examples (not exclusive) of what would not constitute a recommendation:

  • Marketing or making available to a plan fiduciary a platform of investments without regard to the individualized needs of the plan or its participants;

  • Providing selection and monitoring assistance, such as identifying investment alternatives that meet objective criteria specified by the plan fiduciary (provided that the person identifying the investment alternatives discloses in writing whether the person has a financial interest in any of the identified investment alternatives and the precise nature of such interest);

  • Providing objective financial data and comparisons with independent benchmarks to the plan fiduciary;

  • Furnishing or making available general communications to a plan, plan fiduciary, plan participant, beneficiary, IRA, or IRA owner; and

  • Furnishing or making available investment education to a plan, plan fiduciary, plan participant, beneficiary, IRA, or IRA owner.

Investment Education Exception

Under the Final Rule, several items did not change. In general, advice in the nature of investment education is still not considered to be investment advice. Investment education’s four groupings (1. plan information, 2. general financial/investment information, 3. asset allocation models, and 4. interactive investment materials) still exist. Further, the Final Rule makes clear that using asset allocation models and interactive investment materials to identify the specific designated investment alternatives available in a plan can be done without such activity being considered fiduciary investment advice, provided certain additional disclosures and protections are observed.

Other Exceptions

Other exceptions may also apply, including the Employee Advice Exemption, the Best Interest Contract Exemption (BICE), an exception to transactions with independent fiduciaries with financial expertise, an exception for swap and security-based swap transactions, and the Principal Transactions Exemption. In an abridged manner, the two most likely applicable exemptions, the Employee Advice and BICE exemptions, provide as follows:

Employee Advice: Investment advice provided by an employee to a plan fiduciary, other employee, or an independent contractor if the advice is provided in connection with the individual’s role as an employee, and provided the person receives no direct or indirect fee or other compensation in connection with the advice beyond the employee’s normal compensation for that work

Best Interest Contract Exemption: Reflects an effort to align an investment advisor’s interests with client interests and, in doing so, requires a written contract with certain elements, conflict of interest policies and mandates, and precludes certain other activities

Plan Sponsors

If a plan sponsor designates a service provider to provide investment advice to plan participants, the plan sponsor is engaging in an exercise of fiduciary authority and must act prudently and solely in the interest of plan participants. Furthermore, the plan sponsor has a duty to monitor the service provider.

The Final Rule also states that a plan sponsor’s designation of an investment advisor may result in co-fiduciary liability with the investment advisor. If, however, a plan sponsor merely provides education materials and does not receive a fee or other compensation for those communications, the plan sponsor is not acting as a fiduciary.

©2022 MICHAEL BEST & FRIEDRICH LLPNational Law Review, Volume VI, Number 293

About this Author

Jorge Leon, Michael Best Law Firm, Labor and Employee Benefits Attorney
Partner, Diversity and Inclusion Committee Chair

Plan sponsors, administrators, fiduciaries, and third-party recordkeepers turn to Jorge for strategic counsel on designing, establishing, and maintaining retirement plans. Clients laud his responsiveness and meticulous approach to matters ranging from plan establishment and design to government investigations and inquiries, ongoing compliance and qualification, ERISA litigation, and mergers and acquisitions.

Before joining Michael Best, Jorge practiced for 15 years at a premiere Chicago-based AmLaw 100 firm, where he was the lead partner...

Kirk Pelikan, Michael Best Law Firm, Labor and Employment Attorney

Kirk’s practice focuses on legal issues related to all aspects of the employment cycle, from hiring through termination and severance. Substantially experienced in both benefits and employment law, Kirk is well positioned to help clients respond to the opportunities, vulnerabilities and benefit ramifications of particular employment decisions.

Kirk’s focus includes:

  • Developing and maintaining effective compliance strategies related to defined benefit plans, defined contribution plans, executive...

Mark Lotito, Michael Best Law Firm, Labor and Employment Attorney

Mark assists clients in a range of employee benefits matters, including legal compliance, transaction due diligence, and litigation. He brings a multifaceted, big picture outlook to helping clients unravel the challenges of complex benefits-related problems.

He has established a strong track record in achieving successful outcomes for clients confronted by employee benefits litigation and arbitration claims. Mark has also successfully litigated patent and trade secret litigation claims, as well as employment non-compete claims.

Jason Faust, Michael Best Law Firm, Employee Benefits Attorney

Clients rely on Jason for strategic counsel regarding a broad range of employee benefits and executive compensation matters, including:

  • Qualified defined benefit and defined contribution retirement plans, including pension and 401(k) plans

  • Health and welfare plans, including Patient Protection and Affordable Care Act compliance

  • Nonqualified deferred compensation plans

  • Multiemployer pension and health and welfare plans