April 16, 2015
DOL Issues Proposed Guidance on the Definition of an Investment Fiduciary
On April 14, 2015, the Department of Labor (DOL) issued proposed guidance, called the Conflict of Interest Rule, defining who becomes a fiduciary under the Employee Retirement Income Security Act (ERISA) as a result of giving retirement investment advice. The guidance package is extensive and includes proposed regulations, two new proposed class exemptions from the prohibited transaction rules of ERISA and the Internal Revenue Code (IRC), proposed revisions to nine other existing class exemptions, as well as related materials such as a new Regulatory Impact Analysis, FAQs and a Fact Sheet. The package is available here.
Highlights of the proposed guidance include:
- An expanded definition of “investment fiduciary”: Any individual or entity providing any investment advice for a fee to a plan, a plan participant or beneficiary, an IRA, or an IRA owner is a fiduciary and therefore must act solely in the best interests of the participants, beneficiary, or IRA owner. Investment advice includes advising a participant about whether to take a distribution from a plan and roll it over into an IRA. The five-part test used to identify investment fiduciaries under the current regulation is eliminated.
- “Best Interest” standard for IRA advisors: In order to avoid prohibited transactions with respect to commission-based fees, advisers to IRA owners must act in the best interest of the owner consistent with the fiduciary standards that apply to ERISA plan advisors; they may not simply provide “suitable investments” as some are allowed to do under the current Security and Exchange Commission (SEC) rules.
- New rules for investment-based fees: If an investment adviser wishes to receive commissions, revenue sharing, or other fees based on investment advice to a small plan (fewer than 100 participants), or to a participant or an IRA owner, the adviser can do so but only if the adviser enters into a contract — referred to as a “best interest contract” — with the small plan’s fiduciary, the participant or the IRA owner. In the contract, the adviser must acknowledge its fiduciary status, and agree to act in the investor’s best interest, accept only reasonable compensation, and disclose what fees will be received, among other things.
- Permitted “investment education” clarified: The proposed rules further clarify the line between providing “investment education,” which will not make the provider a fiduciary, and providing “investment advice,” which will make the provider a fiduciary.
- ESOP appraisal rules to be addressed: When and whether ESOP appraisers are subject to the fiduciary rules will be addressed in separate guidance.
The proposed guidance is scheduled to be published in the April 20, 2015 Federal Register. DOL has asked for comments within 75 days of that date, and will hold a public hearing after the comment period ends. The guidance will not be effective until DOL issues final guidance.
Share this page