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DOL Releases Final Regulations to Expand ERISA ‘Fiduciary’ Definition

In Depth

After more than five years of development and revision, the US Department of Labor (DOL) released final regulations to redefine a “fiduciary” under the Employee Retirement Income Security Act of 1974, as amended (ERISA) and the Internal Revenue Code of 1986, as amended (the Code). Calling these “conflict of interest” rules, the DOL sought to expand ERISA protections for participants by expanding the category of persons treated as a fiduciary by rending investment advice for a fee.  Although the DOL did not deviate from its stated goal of expanding the communications that constitute fiduciary investment advice, it incorporated feedback from public comments into the final regulations.

The final regulations require investment advisers for ERISA-governed retirement plans and individual retirement accounts (IRA) to act in the best interest of their clients as “fiduciaries” within the meaning of ERISA and the Code, and provides carve-outs to these rules in certain situations. While the regulations hold many implications for advisers and their firms, this summary focuses on the relevant provisions for plan sponsors.

Investment Advice Covered in the Fiduciary Definition

Under the final regulations, only when an adviser makes recommendations to plans, plan fiduciaries, plan participants or beneficiaries, and IRA owners are they considered a fiduciary rendering investment advice. Consistent with the approach of the Financial Industry Regulatory Authority (FINRA), an adviser recommendation is advice when, based on its content, context and presentation, it would reasonably be viewed as a suggestion to engage in or avoid certain actions. The more individually tailored the communication, the more likely it is to be considered a recommendation. Recommendations are provided in exchange for a “fee or other compensation, direct or indirect.”

Investment Advice Not Covered in the Fiduciary Definition

The DOL has identified multiple exclusions from the fiduciary definition which are of great interest to plan sponsors, including:

  • Employees of plan sponsors, affiliates, employee benefit plans, employee organizations, or plan fiduciaries, as long as they receive only their normal compensation for the work performed for their employers;

  • Health and welfare plans are not subject to the rules, to the extent that these plans lack an investment component;

  • Education about retirement savings and general investment information;

  • General communications that would not reasonably be viewed as investment recommendations;

  • General platforms of investment alternatives that service providers offer to participants, as long as the provider represents in writing to the plan fiduciary that it is not providing impartial investment advice or giving advice in a fiduciary capacity; and

  • Asset valuations. While an earlier DOL proposal included in the definition of fiduciary appraisers of privately held stock for an employee benefit plan, such as an employee stock ownership plan (ESOP), this rule was eliminated from the final regulations.  The DOL states that it is looking into another regulation project to address issues related to these valuations.

Best Interest Contract Exemption

Under ERISA and the Code, advisers who provide fiduciary investment advice to plan sponsors, plan participants and IRA owners engage in prohibited transactions if they receive payments for the investments because it creates a conflict of interest. The “best interest contract exemption” allows advisers recommending any asset to continue many current compensation practices, as long as they (1) commit to providing “advice in the client’s best interest, charge only reasonable compensation, and avoid misleading statements about fees and conflicts of interest”; (2) adopt policies and procedures to ensure providing best interest advice and eliminating financial incentives for advisers to act against the client’s best interest; and (3) disclose conflicts of interest.

Implementation

Although the final regulations will have the greatest impact on the investment adviser marketplace, they will also impact advisers to plan sponsors, and therefore affect plan sponsors themselves.

The final regulations will be effective April 10, 2017, but the DOL will allow advisers and their firms through January 1, 2018, to comply with the best interest contract exemption.  However, the House of Representatives passed a resolution repealing the regulations on April 29, 2016.  Though a repeal of the regulations during the current Congressional session is extremely unlikely as opponents are unlikely to obtain the votes to override a presidential veto, there is a possibility the rules are repealed after the 2016 election. 

© 2019 McDermott Will & Emery

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About this Author

Brian J. Tiemann, Labor Attorney, McDermott Law Firm
Partner

Brian J. Tiemann is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office.   Brian focuses his practice on a variety of employee benefits matters related to pension plans, 401(k) plans, employee stock ownership plans (ESOPs), cafeteria and welfare plans, executive compensation and the implementation of benefit programs for domestic partners of employees.  He is a member of the Firm’s ESOP Affinity Group and has worked with clients to structure and maintain the qualified status of their ESOPs with the Internal Revenue...

312-984-3268
Joseph K. Urwitz, Employee Benefits Lawyer, McDermott Will Emery Law Firm
Associate

Joseph K. Urwitz is an associate in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Boston office.  He focuses his practice on employee benefits, executive compensation and ERISA matters.  Joe’s experience includes ERISA fiduciary issues, benefits issues faced by non-profit entities, executive compensation and deferred compensation arrangements, equity award plan design, employment and severance arrangements, qualified plan work and employee benefits matters arising in mergers and acquisitions.

Joe received his J.D. from the University of Chicago Law School and his B.A., cum laude, from Williams College.

617-535-3854
Sarah G. Raaii, McDermott Will Emery, Chicago, International Financial Services Lawyer, Regulation matters Attorney
Associate

Sarah G. Raaii is an associate in the law firm of McDermott Will & Emery and is based in the Firm’s Chicago office. She focuses her practice on employee benefits matters.

Sarah previously worked full-time with in-house attorneys and federal and state lobbyists at an international financial services corporation. She was most recently selected as a National Economic Council legal intern at the White House, where she worked on benefits regulation and policy.

Sarah received her J.D. with distinction from the University...

312 984 6966