April 7, 2016

DOL Issues Final Regulations Redefining Investment Fiduciary

On April 6, 2016, the Department of Labor (DOL) issued final regulations, called the “Conflict of Interest” regulations, redefining who is a fiduciary under Section 3(21)(A) of the Employee Retirement Income Security Act (ERISA) as a result of giving investment advice.

The guidance package consists of:

  • New final regulations, which replace regulations originally issued in 1975,
  • Two new class exemptions from the prohibited transaction rules, including one for advisers who enter into “best interest contracts” (BIC Exemption), and
  • Revisions to existing class exemptions.

The package is generally applicable as of April 10, 2017 (a year from now), but a longer transition period — to January 1, 2018 — applies to certain portions of the two new class exemptions that require additional time to implement (e.g., with regard to IRAs, use of the contract in the BIC Exemption).

The primary goal of the new regulations is to expand the definition of investment fiduciary so that many investment advisers who were not fiduciaries under the existing regulations will become fiduciaries under the new regulations. This is accomplished by a much broader definition of what constitutes investment advice. For example, no longer will an adviser avoid fiduciary status because the adviser is not giving investment advice on a “regular” basis, or because the advice is not “a primary basis” of the investment decision. The regulation also expands the fiduciary definition to include advisers to IRAs.

The new regulations are directed primarily at investment advisers to §401(k)-type plans with participant-directed investments and IRAs, but apply to all types of ERISA plans and certain non-ERISA plans (e.g., Health Savings Accounts, Archer Medical Savings Accounts, Coverdell Education Savings Accounts).

With regard to employer-sponsored plans, from a preliminary review, it appears that the primary impact of the new regulations for large plans will be on advice to plan participants and beneficiaries, including when they seek advice about distributions and rollovers. The new rules require the financial institution (i.e., platform provider) to acknowledge its fiduciary status to the participant and have certain related policies and procedures in place.

With regard to advice to the plan, most investment advisers to large employer-sponsored plans are already acting in a fiduciary capacity, so it appears that the new fiduciary definition will have minimal impact. There had been some concern, based on the proposed regulations, that the new regulations might hinder participant investment education, particularly with regard to the efficacy of asset allocation models and interactive planning programs. However, the new regulations appear to have provided sufficient flexibility so as not to negatively impact investment education.

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