After a drawn out and controversial regulatory review process, the United States Department of Labor (DOL) on April 6, 2016, issued final guidance that expands the definition of a “fiduciary” under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code regarding persons or entities that render investment advice for compensation, received directly or indirectly, with respect to assets held in retirement plans or individual retirement accounts (IRA). This rule replaces the original fiduciary rules that were adopted in 1975 shortly after ERISA was enacted, and reflects the DOL’s belief that the retirement industry has evolved significantly since then considering the explosive growth in participant-directed 401(k) plans and in IRA’s nationwide. The rule extends the fiduciary standard contained in ERISA to investment advisers who until now have not been required to adhere to those standards or to contend with ERISA’s related prohibited transaction rules. While the final rule retains the basic structure and approach as the DOL’s proposed rule, which was released in 2015, the final rule includes significant changes and clarifications that the DOL hopes will make the rule more useable and will reduce compliance burdens. The scope of the DOL’s revisions suggests the agency carefully considered the extensive comments received in response to the proposed rule.
The final rule could threaten common arrangements that financial advisers have with ERISA-covered plans and IRAs under ERISA’s fiduciary duty rules or under related prohibited transaction rules. To provide relief, the DOL also released several related pieces of guidance, including:
- The final form of the new best interest contract exemption (BICE).
- An amendment to and a partial revocation of Prohibited Transaction Exemption 84-24.
- A mendments to Class Exemptions 75-1, 77-4, 80-83 and 83-1.
Upon the satisfaction of express conditions, the BICE provides conditional relief for common conflicted compensation arrangements, including commissions and revenue sharing, that advisers historically have received in connection with rendering investment advice. The BICE is available to both plans and IRAs and provides needed relief from the otherwise applicable prohibited transaction provisions in ERISA that would otherwise apply if a participant is deemed to be a fiduciary. The BICE outlines the steps to be taken in order to gain relief (as covered below, those necessary steps have been significantly streamlined in the final rule). The other pieces of guidance are aimed at allowing certain broker-dealers, insurance agents and other vendors that act as investment fiduciaries to continue to receive various forms of conflicted compensation that otherwise may be prohibited under ERISA.
While the final rule is aimed primarily at financial advisers, it also affects plan sponsors considerably. Plan sponsors need to review and understand the nature of the relationships they have with their advisers, including whether their advisers should be considered ERISA fiduciaries and whether the fees they pay their advisers are reasonable. Failure to do so could subject the plan sponsors to potential ERISA fiduciary violations. Moreover, plan sponsors should expect to receive new disclosures and amended contracts from their advisers. Continue Reading