April 28, 2016

What Employers Need To Know About the DOL Fiduciary Regulations

By now, you may have heard that the Department of Labor (DOL) has expanded fiduciary status for certain investment advisers to retirement plans or IRAs. Some of your providers are already fiduciaries, but some will now be considered fiduciaries for the first time. Anyone who provides investment recommendations or advice to retirement plan investors for a fee will likely be deemed a fiduciary. Although broadly defined, investment recommendations or advice do not include investment education, general communications such as newsletters or advice by a plan sponsor’s employees on behalf of the plan sponsor, subject to certain requirements. To avoid prohibited transactions, fiduciaries can use an exemption, such as the new Best Interest Contract Exemption, which has several requirements to mitigate conflicts of interest.

The good news for plan sponsors is that the new regulations do not require any actions beyond preexisting fiduciary duties. But here are a few things for plan sponsors to keep in mind:

  • With all the buzz about fiduciary status and standards, consider updating your fiduciary training for internal plan fiduciaries.
  • Now may be a good time to also review your fiduciary liability insurance coverage.
  • The new rules will be phased in starting in April 2017, with full compliance required by January 1, 2018. Be cautious of providers who may try to take advantage of this compliance window by offering products or services that may be permissible now, but will not be in the future.
  • Remember all the disclosures you received when the 408(b)(2) regulations went into effect in 2012? This experience should be very similar, because once a provider becomes a fiduciary paid directly or indirectly by the plan, the 408(b)(2) fee disclosure rules apply. Some service providers may reach out to you in the next year and a half to update your service agreements and provide disclosures. As was the case previously, you should review the materials, consider whether the services offered are changes and whether the compensation is reasonable. Remember to document your process and review, as it will be helpful in case of a DOL compliance audit.
  • Advisers who are selected by a plan participant (e.g., someone advising a participant regarding rollovers from the plan to an IRA recommended by that adviser) should provide disclosure to the participant and enter into an agreement with the participant (rather than the plan sponsor). Plan sponsors should be leery of taking on responsibility for the selection and oversight of advisers who are actually selected by the participant.
  • Plan sponsors are generally not responsible for ensuring that the service providers they select are compliant with the new fiduciary regulations. However, plan sponsors could be held liable as co-fiduciaries in the event that they knowingly participate in a fiduciary breach, or have knowledge of the provider’s fiduciary breach and fail to act on that knowledge.
  • To avoid being a fiduciary, some providers may limit individual participant services to fit within the investment education exception. Plan sponsors and participants may notice changes to the services they receive.
  • On the upside, you can expect fewer hidden fees and greater transparency from your advisers.
  • Plan sponsors should consider what communications participants currently receive from service providers selected by the plan sponsor regarding rollovers, and whether any changes should be made. Rollover or distribution recommendations will be covered by the fiduciary rules.
  • It will take years to fully realize the impact of these regulations, but one likely effect may be decreased rollovers out of employer plans. You may want to consider how plan design regarding fees and distribution options may be impacted.

Look for continued updates as the full business and legal implications of the new regulation and prohibited transaction exemptions come to light. In the meantime, if you are interested in a more detailed discussion of the above, read the in-depth analysis of the new regulations and prohibited transaction exemptions written by FaegreBD partners Doug Heffernan and Megan Hladilek and associate Graham Widmer.

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