The Department of Labor’s (DOL) new fiduciary investment advice proposal replaces or updates past guidance about advice to plan sponsors and participants in ways that would provide additional protections and make fees and who is acting as a fiduciary clearer.
However, the proposal also changes the distinction between education and advice in such a way that some expect plan sponsors and participants to have access to less help and guidance.
The DOL started out its rule proposal by explaining why it thought past guidance needed to be updated. Current regulations include a five-part test for determining if a person or entity is providing fiduciary investment advice. The five-part test includes conditions that (1) the advice regarding plan investments be rendered “on a regular basis;” (2) the advice would serve as a primary basis for investment decisions with respect to plan assets; (3) the recommendations are individualized for the plan; (4) the party making the recommendations receives a fee for such advice; and (5) the advice is made pursuant to a mutual understanding of the parties.
The DOL is proposing to replace that regulation (established in 1975) with a new definition: a person renders fiduciary investment advice by (1) providing investment or investment management recommendations or appraisals to an employee benefit plan, a plan fiduciary, participant or beneficiary, or an individual retirement account (IRA) owner or fiduciary, and (2) either (a) acknowledging the fiduciary nature of the advice, or (b) acting pursuant to an agreement, arrangement, or understanding with the advice recipient that the advice is individualized to, or specifically directed to, the recipient for consideration in making investment or management decisions regarding plan assets.
The DOL contends that the lines drawn by the five-part test frequently permit evasion of fiduciary status and responsibility in ways that undermine the statutory text and purposes of the Employee Retirement Income Security Act (ERISA) and subsequent guidance. As a specific example, the agency mentions an adviser’s assistance with a one-time purchase of a group annuity to cover promised benefits when a defined benefit (DB) plan terminates. The agency says that due to the “regular basis” requirement of the five-part test, the adviser would not be a fiduciary. Under the new rule, the adviser would be a fiduciary, and in that way, the rule would provide more protection for plan sponsors.
In addition, the DOL noted that the “regular basis” requirement also deprives individual participants and IRA owners of statutory protection when they seek specialized advice on a one-time basis, such as for help with the decision to make an annuity purchase or to roll over their accounts. The new proposal would make the person or entity giving this advice a fiduciary and provide statutory protection in these cases.
Plan sponsors may think provisions of the new rule related to IRA owners do not affect them, but it is important to note that the rule inclusively defines an “IRA” as any account described in Internal Revenue Code section 4975(e)(1)(B) through (F), such as a true individual retirement account described under Code section 408(a) or a health savings account (HSA) described in section 223(d) of the Code.
The new definition of fiduciary investment advice generally covers the following categories of advice: (1) investment recommendations, (2) investment management recommendations, (3) appraisals of investments, or (4) recommendations of persons to provide investment advice for a fee or to manage plan assets.
The new proposal includes several carve-outs for persons who do not represent that they are acting as ERISA fiduciaries. Subject to specified conditions, these carve-outs generally cover:
- statements or recommendations made to a “large plan investor with financial expertise” by a counterparty acting in an arm’s length transaction;
- offers or recommendations to plan fiduciaries of ERISA plans to enter into a swap or security-based swap that is regulated under the Securities Exchange Act or the Commodity Exchange Act;
- statements or recommendations provided to a plan fiduciary of an ERISA plan by an employee of the plan sponsor if the employee receives no fee beyond his or her normal compensation;
- marketing or making available a platform of investment alternatives to be selected by a plan fiduciary for an ERISA participant-directed individual account plan;
- the identification of investment alternatives that meet objective criteria specified by a plan fiduciary of an ERISA plan or the provision of objective financial data to such fiduciary;
- the provision of an appraisal, fairness opinion or a statement of value to an employee stock ownership plan (ESOP) regarding employer securities, to a collective investment vehicle holding plan assets, or to a plan for meeting reporting and disclosure requirements; and
- information and materials that constitute “investment education” or “retirement education.”
The DOL say this clarity about advisers’ fiduciary status would strengthen its enforcement activities resulting in fuller and faster correction, and stronger deterrence, of ERISA violations.
Regarding what constitutes “investment education” or “retirement education,” the new proposal incorporates much of the guidance found in the DOL’s Interpretive Bulletin 96-1, released in 1996, but there are exceptions. As a departure from IB 96-1, paragraph (b)(6) of the proposed regulation says investment education information and materials may not include advice or recommendations as to specific investment products, specific investment managers, or the value of particular securities or other property.
This concerns attorney Jason Roberts, chief executive officer of Pension Resource Institute, who says someone providing a valuable service to plan sponsors and participants as a non-fiduciary will now have to do something different to remain a non-fiduciary due to this departure from IB 96-1.
He explains that participants are reluctant to pore through fund fact sheets and investigate investments on their own. Under 96-1, educators could use a combination of interactive investment materials, such as risk tolerance questionnaires, and could suggest hypothetical allocations, specifying a percentage to each asset class. Educators could even show which funds in their particular plan fulfill those asset classes, if they used a disclaimer that said the material showed only hypothetical examples and participants were free to make their own choices, according to Roberts, who added, “This would be gone, and participants couldn’t take the hypothetical example and easily pick plan investments.”
“That scenario, in which participants could use that information to select investments, was a win-win,” Roberts says. “We’ve seen it work. It is refreshing to participants, and plan sponsors could do this education in a group setting and know, at a minimum, participants would have diversified investments.”
Roberts adds that the majority of retirement plan sponsors are small, and may be working with non-fiduciary advisers that only provide education for participants. He contends the small plan sponsors working with fiduciary advisers are outliers. Firms that cannot or may not provide fiduciary services to plan sponsors and were able due to provisions of IB 96-1 to provide help, can’t now, and working with fiduciary advisers will cost plan sponsors and participants more, Roberts says.
The DOL says in its regulation that it “believes that effective and useful asset allocation education materials can be prepared and delivered to participants and IRA owners without including specific investment products and alternatives available under the plan.” However, it invited comments whether this change to previous guidance would be appropriate.
On a more positive note, with lifetime income a growing focus in the retirement industry, the DOL said commenters persuaded it that additional guidance may help improve retirement security by facilitating the provision of information and education relating to retirement needs that extend beyond a participant’s or beneficiary’s date of retirement. Accordingly, paragraph (b)(6) of the proposal includes specific language to make clear that the provision of certain general information that helps an individual assess and understand retirement income needs past retirement and associated risks (e.g., longevity and inflation risk), or explains general methods for the individual to manage those risks both within and outside the plan, would not result in fiduciary status under the proposal.