The majority of the DOL’s complex regulations mandating fiduciary status for individuals dealing with retirement investment decision-making involve investment advisors. However, the regulations, effective April 10, 2017, also require plan sponsors (who are always the fiduciary) to take certain steps. The rules also expand the definition of fiduciary status.
A Fresh Coat of Primer on the New Fiduciary Status Rules
The rules do not remove fiduciary status from plan sponsor employees who already serve in that capacity. This group includes investment committee members and any other individuals that have control over plan management or plan investments. However, under the new rules, the following four criteria must apply to an employee who provides advice to plan participants:
- The employee’s job responsibilities cannot include providing investment advice or recommendations.
- The employee may not be registered or licensed under federal or state securities or insurance laws.
- The employee’s guidance may not require registration or licensing under such laws.
- The employee may not receive any compensation in connection with the advice beyond the employee’s normal compensation for work performed for the employer.
Now is the time for organizations to strive to ensure that their in-house treasuries, human resources, and other investment staff can qualify for these exceptions.
Reconstructing the Roles of Service Providers
Businesses need to have a clear understanding of changes their plan’s service providers may make as they seek to adjust to the new regulations. Service providers that already explicitly acted in a fiduciary capacity will continue to do so. However, some service providers may, without changes on their part, fall into the fiduciary category. Plan sponsors are responsible for deciding whether to either acknowledge their fiduciary status or change their role to avoid it. Any vendor that takes on a fiduciary status must say so in writing.
The rule does not impose fiduciary obligations on advisors if they know or reasonably believe that the fiduciary either:
- is a licensed and regulated provider of financial services, or
- manages plans with $50 million or more in assets.
Advisors seeking to rely on this provision may ask for a written representation that the employer is exercising independent judgment and is capable of evaluating investment risks. They must inform the employer of any financial interest in the transaction. Finally, they cannot receive a direct fee in association with the provided advice.
BICE Agreements: A Possible Blueprint for Avoiding Fiduciary Status Rules
One way service providers, especially those that are compensated according to plan sponsors’ investment choices, can try to avoid fiduciary status is to change their business model and enter into a best interest contract exemption (BICE) agreement. Such a contract could change the nature of the business relationship in a manner that will be spelled out in the signed agreement.
When entering into a BICE agreement, plan sponsors should do the following with their service providers:
- Determine how they intend to comply with the fiduciary rules.
- Assess whether their documentation clearly and completely explains any changes.
- Decide whether any changes in their role leave gaps in necessary services, particularly in regard to advice on investment solutions.
Refurbishing Rollover Discussions
The mandates pull certain communications about IRA rollover options into the definition of advice — specifically, whether or not the plan sponsor urges participants to roll over plan funds into particular IRA investments. The DOL’s concern is that advisors who manage retirees’ IRAs will skew their communications about rollovers in favor of that option to generate more revenue.
An explanation of the pros and cons of rolling over to an IRA in a completely neutral fashion is not considered advice. However, if materials or suggestions by call center representatives suggest that one choice might be more suitable than another option, then such messages could constitute advice conferring fiduciary status.
The new DOL fiduciary regulations hold plan sponsors responsible for monitoring education materials to ensure they do not cross the line between education and advice. Therefore, businesses should establish a routine procedure for reviewing all educational materials with their benefits specialists.
Let CRI Help Design Your Approach to the New Fiduciary Status Rules
The DOL regulations are quite complex. In fact, it might take months or even years for their practical application to be fully understood. Nonetheless, CRI is ready now to help you determine how the new rules might renovate your fiduciary status. Contact us today!