Second DOL FAQ Published Detailing Communication Standards

Many of the questions advisers and providers have asked about the Department of Labor fiduciary rule relate to the line drawn between fiduciary and non-fiduciary client communications.

The future of the Department of Labor (DOL) fiduciary rule reform may be in jeopardy as Republicans take full control of Congress and the Presidency—but it seems that the regulator will push ahead on implementing stronger conflict of interest standards unless it is expressly ordered to halt.  

Specifically, the DOL this week released a second “Fiduciary Rule FAQ” document, adding another 20 or so pages to the thousands already published outlining the broad and narrow facets of the new conflict of interest standards to be applied under the Employee Retirement Income Security Act (ERISA). The FAQ document focuses on both the new fiduciary rule and its related prohibited transaction exemptions; these are slated to begin to take effect in just about 12 weeks under the timeline set by the Obama Administration, with various enforcement deadlines extending into 2018.

Questions covered in the second FAQ document range from the general to the specific. For example, on the high-level question, “Is every communication with a financial adviser about retirement accounts a fiduciary recommendation?,” DOL answers simply, “No.”

As the document explains, covered investment advice is defined as a recommendation to a plan, plan fiduciary, plan participant and beneficiary, individual retirement account (IRA), or IRA owner for a fee or other compensation, direct or indirect. As a threshold issue, DOL says, the communications must be a “recommendation” to be fiduciary investment advice. A “recommendation” is a communication that, “based on its content, context, and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular investment-related course of action.”

The DOL document makes it clear that it is very easy to step over the line into the territory of fiduciary advice: “Providing a selective list of securities to a particular advice recipient as appropriate for that investor would be a recommendation as to the advisability of acquiring securities even if no recommendation is made with respect to any one security.” Broadly speaking, the more individually tailored the communication is to a specific advice recipient or recipients, the more likely the communication will be viewed as a recommendation.

NEXT: FAQ highlights communication pitfalls 

DOL goes on to explain that the revised fiduciary rule “provides for clarifications of communications that do not constitute recommendations and for communications that are excluded from the operation of the rule even though they may technically rise to the level of recommendations.”

“Merely furnishing information and materials that describe the terms or operation of a plan or IRA or product features of investment alternatives available under a plan or IRA, general financial, investment, and retirement information, certain asset allocation models and interactive investment materials, all would be investment education under the rule and not advice,” DOL suggests. “As a result, merely describing to a potential customer the attributes and features of an investment product without a specific recommendation would not be investment advice.”

A great deal of the DOL FAQ document is dedicated to issues of this nature—attempting to further clarify the line between education and advice.

On the question, “Do fiduciary investment recommendations include the communications a financial services company has with its own employees in their capacity as employees regarding their job responsibilities merely because the employees may in the ordinary course of their employment provide fiduciary investment advice to plans or IRAs?,” DOL says this is not the case.

Along these same lines, DOL considers the case of an employee working for a financial adviser who provides investment advice to 401(k) participants and IRA owners. The employee’s normal job responsibilities include development of models and materials for the adviser to use when presenting recommendations. “Is the employee providing fiduciary investment advice under the rule when he or she develops these materials for his or her employer?,” DOL asks. The answer again is “No.”

Other questions are more exacting: “An investment adviser who is also a licensed insurance agent approaches a client who will soon begin receiving minimum required distributions from the client’s 401(k) plan accounts and IRAs. The adviser recommends that once the client receives these required minimum distributions they should be used to fund a permanent life insurance product. The investment adviser in his or her capacity as insurance agent will receive a commission on the sale of the permanent life insurance product. Is the recommendation of the permanent life insurance product investment advice covered by the rule?”

In this situation, DOL says the answer must be a clear “Yes.” Because the minimum required distributions are compelled by the Internal Revenue Code, the adviser has not recommended a distribution from a plan or IRA simply by explaining the tax requirements and telling the plan participant that the law requires those distributions. However, the adviser has made a recommendation as to how securities or other investment property of a plan or IRA should be invested after the funds are distributed from the plan or IRA within the meaning of paragraph (a)(1)(i) of the Rule.”

NEXT: Further technical clarifications 

DOL suggests the new fiduciary rule draws an important distinction between non-fiduciary investment education and fiduciary recommendations, noting that “paragraph (b)(2)(iv)” defines non-fiduciary education as covering four categories of information and materials.

First is plan and investment information, defined as information and materials that describe investments or plan alternatives without specifically recommending particular investments or strategies. According to DOL, “an adviser would not act as a fiduciary merely by describing the investment objectives and philosophies of plan investment options, mutual funds, or other investments; their risk and return characteristics; historical returns; the fees associated with the investment; distribution options; contract features; or similar information about the investment.”

The second type of non-fiduciary education comes in the form of “general financial, investment, and retirement information.” As DOL notes, “one does not become a fiduciary merely by providing information on standard financial and investment concepts, such as diversification, risk and return, tax deferred investments; historic differences in rates of return between different asset classes; effects of inflation; estimating future retirement needs and investment time horizons; assessing risk tolerance; or general strategies for managing assets in retirement.” DOL says all of this is non-fiduciary education “as long as the adviser does not cross the line to recommending a specific investment or investment strategy.”

The other two classes of non-fiduciary education can be lumped into the categories of “asset allocation models” and “interactive investment materials.”

“Here too, firms and advisers can provide non-fiduciary information and materials on hypothetical asset allocations as long as they are based on generally accepted investment theories, explain the assumptions on which they are based, and do not cross the line to making specific investment recommendations,” DOL clarifies. “In the case of ERISA-covered plans, the models may reference specific designated investment alternatives on the plan’s menu as hypothetical examples to aid participant understanding, as long as the examples meet the Rule’s protective conditions … Again, firms and advisers can provide a variety of questionnaires, worksheets, software, and similar materials that enable workers to estimate future retirement needs and to assess the impact of different investment allocations on retirement income, as long as the adviser meets conditions similar to those described for asset allocation models.”

As with the first DOL FAQ document published to help explain the fiduciary rule, there is a lot in this second publication for technology committed firms to like—and for those firms that have committed to more flat-fee business and transparency.   

The full FAQ document is here. The first FAQ previously published can be accessed here