April 13, 2016
To learn more about Lathrop GPM, click here ›
eBenefits Alert: Long-Awaited DOL Fiduciary Rules Issued, Definition of “Fiduciary” Expanded to Protect Retirement Plan Investors
1. What are the new rules about and why were they issued?
The Department of Labor (“DOL”) previously issued fiduciary regulations many years ago, back in 1975. Given the proliferation of participant-directed investments and IRAs as well as the increased complexity of financial instruments, the DOL believes that these old rules are no longer adequate to protect retirement benefit (both ERISA and IRA) investors. The DOL’s primary concern is that providers of retirement investment alternatives may have significant conflicts of interest causing them to make investment recommendations that are not in the best interests of the investor.
2. What types of communications are treated as investment advice?
A person renders investment advice if s/he has a relationship described in 4, below, and provides a plan, plan fiduciary, plan participant, IRA, or IRA owner the following types of advice in exchange (directly or indirectly) for a fee or other compensation:
3. What constitutes a “recommendation?”
The determination of whether a communication is a “recommendation” is subjective rather than objective. The regulations describe a “recommendation” as a communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the recipient engage in or refrain from taking a particular course of action. The more tailored the communication is, the more likely it is to be considered a recommendation.
4. What type of relationship must exist between parties in order for a “recommendation” to be considered investment advice?
The new rule covers the following types of relationships:
5. What types of communications are not considered investment advice?
6. What is the Best Interests Contract Exemption (“BICE”) and when does it apply?
In connection with the new fiduciary rules the DOL issued a prohibited transaction exemption, allowing for certain actions by financial services providers that would otherwise be prohibited as “self-dealing” to be exempt from the prohibited transaction rules of ERISA and the Internal Revenue Code. In order to qualify for the exemption, financial service providers will need to take a number of steps to ensure that they are acting in the best interests of investors. The steps include establishing procedures to both disclose and avoid potential conflicts of interest.
7. Are appraisals, e.g., valuations of an employer conducted in connection with an ESOP transaction, addressed in the new rules?
No, the DOL says that it will address appraisals in a separate rulemaking project.
8. When will the new rules take effect?
The rules will generally take effect in April, 2017, but full compliance with the BICE requirements will be delayed until January 1, 2018. Until January 1, 2018, the DOL says that it will focus on assisting with compliance with the rules rather than enforcement. Until April, 2017, the current fiduciary rules apply. These rules generally do not provide as much protection to investors as the new rules. Plan sponsors might want to keep this in mind during the next year, particularly with respect to advice given to terminating participants by investment service providers regarding rollovers to IRAs.
© 2020 LATHROP GPM, ALL RIGHTS RESERVEDCLICK HERE TO UNSUBSCRIBE | POWERED BY FIRMSEEK
The information contained in this document is provided to alert you to legal developments and should not be considered legal advice. It is not intended to and does not create an attorney-client relationship. Specific questions about how this information affects your particular situation should be addressed to one of the individuals listed. No representations or warranties are made with respect to this information, including, without limitation, as to its completeness, timeliness, or accuracy, and Lathrop GPM shall not be liable for any decision made in connection with the information. The choice of a lawyer is an important decision and should not be based solely on advertisements.
If you do not wish to receive any further communication from Lathrop GPM LLP, please send an email to firstname.lastname@example.org with the subject UNSUBSCRIBE.