Employee Benefits News examines legal developments that impact the employee benefits and executive compensation employers provide, including federal and state legislation, rules from federal...
Financial service providers who’ve asked the Department of Labor for more clarity on the agency’s fiduciary rule got their wish granted.
The DOL’s Employee Benefits Security Administration on Jan. 13 released a set of Frequently-Asked-Questions geared toward 35 questions arising in the nine months since the rule was finalized. The rule is set to take effect in April, although Republicans are attempting to have it pushed back at least two years to give President-elect Donald Trump time to review it.
These FAQs have “a number of positive confirmations concerning questions that the industry had raised,” Thomas Roberts of Groom Law Group in Washington told Bloomberg BNA. Roberts is a member of Groom’s fiduciary practice group.
In particular, the FAQs address a number of questions the industry had about communications that take place within a financial organization, Roberts said. The DOL confirmed that these types of communications are generally not fiduciary activity. “This comes as a great relief to a number of clients that were concerned about that,” he said.
Joseph S. Adams, a partner at McDermott Will & Emery, Chicago who advises plan sponsors and fiduciaries likewise saw the FAQs as providing some needed clarity. “They make clear that not every communication with a financial adviser about retirement accounts is a fiduciary communication,” he said. “The FAQs even clarify that the result of certain subtransfer fees and other third-party compensation received by an adviser can avoid being a prohibited transaction if those fees and compensation are disclosed to the fiduciaries and offset from the adviser’s regular fees.”
The rule provides that a person who’s paid for making a “recommendation” regarding an investment is a fiduciary under the Employee Retirement Income Security Act. In the FAQs, the EBSA sets out several examples of situations in which a person won’t be considered to have made an investment “recommendation.” One situation is when an employee of a financial services company develops models and materials for investment advisers to use when presenting recommendations. In this situation, the communication isn’t considered a recommendation that would make the employee a fiduciary, the agency said.
In another example, the EBSA said investment “recommendations” don’t include situations in which a vendor sends communications to plan participants explaining that their 401(k) accounts will be automatically rolled over to an individual retirement account if they don’t make an election about where to send the assets.
McDermott’s Adams saw this as positive news. What service providers say to participants about rollovers has been an increasingly sensitive issue for plan fiduciaries, he said.
“According to the DOL, simply providing general education materials about keeping monies in the plan versus cashing out the amounts or rolling them over to an IRA would not be a fiduciary recommendation--even if the person or entity received a fee for providing the information. However, if the person or entity went on to recommend a third party to provide investment advice to the participant and received a referral fee from the third party, that recommendation would constitute a fiduciary recommendation,” Adams said.
The EBSA also clarified in the FAQs that investment advisers won’t be considered fiduciaries for investment decisions made by their clients if those decisions are against the adviser’s recommendations.
The agency also took steps in the FAQs to set out situations in which it’s OK for plan sponsors and others to provide investment education, as opposed to an investment decision. In one example, the EBSA said that providing a factual explanation of what a guaranteed lifetime income feature is would constitute plan information and wouldn’t be an investment recommendation.
In another example, the agency said employers can recommend that plan participants increase their contributions to a suggested percentage of compensation to maximize the employer match without that communication being treated as fiduciary investment advice.
In addition, financial service providers’ interactive investment tools will be treated as investment education and not as fiduciary investment advice, the agency said.
The EBSA also issued a set of FAQs on Jan. 13 geared toward consumers. In October, the agency issued its first set of FAQs that were aimed at giving some clarity to the fiduciary rule’s prohibited transaction exemptions.
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