Parsonage Vandenack Williams LLC
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Next Steps for Plan Sponsors as the Fiduciary Rule on Investment Advice Takes Effect

A new “Fiduciary Rule” (“Rule”) took effect on June 9, 2017, related to investment advice provided with respect to employee benefit plans (“Plans”) subject to the Employee Retirement Income Security Act of 1974 (“ERISA”) and also to individual retirement accounts (“IRAs”).

If you are a sponsor of at least one Plan -- and are, therefore, a “Plan Sponsor” – it is important to consider the impact of the Rule and avoid any legal missteps.

The Rule is aimed at those who provide investment advice to Plans and to those who participate in Plans (“Participants”). The Rule, however, only applies to those who receive compensation for providing such advice.  In addition, the Rule also covers record-keeping platforms, broker-dealers, and providers of other types of services if such providers receive revenue-sharing payments or other “indirect” compensation other than from the Plan or Plan Sponsor.

If a person provides investment advice for compensation with respect to a Plan, such person will now be held to a “fiduciary” standard. A “fiduciary” standard is a much higher “duty of care” than the prior standard of “suitability.”  As a result, a much larger class of transactions will be considered to create a “conflict of interest” between the interest of the advisor and the best interest of the Plan or Participant.

You may have heard that the Rule is being implemented on a “transitional” basis, or that the Rule is subject to further revisions before final implementation, or that the Department of Labor (“DOL”) and Internal Revenue Service (“IRS”) have announced that during the transition period no enforcement actions will be taken against those attempting to comply with the Rule in good faith. All of the above are true.

Nevertheless, the foregoing ought not distract you from the fact that key portions of the Rule are already in effect with the force of law, and are not likely to change absent an act of Congress that does not appear to be forthcoming.

The two key elements of the Rule that are already in effect are these:

  • Any person receiving compensation for investment advice to a Plan or Participant is defined as a “fiduciary” with an obligation to act in such a capacity as of June 9,2017; and
  • In order to conform to the duty to act as a fiduciary, any person receiving compensation for investment advice must comply with “impartial conduct standards” (“Impartial Conduct Standards”).

There will be additional disclosures and paperwork that in many cases can be delayed until January 1, 2018 (or a later date if full implementation of the Rule is delayed further), but the “fiduciary duty” is in effect now, and the obligation to fulfill that duty by complying with the Impartial Conduct Standards is in effect now.  Moreover, when the more detailed aspects of the Rule are implemented, the Impartial Conduct Standards will remain, since they are incorporated into the heart of the requirements of the Rule.


Why Should a Plan Sponsor Care? Plan Sponsors already have a fiduciary duty to the Participants in your Plan or Plans. You have a legal obligation to prudently select and monitor all service providers of the Plan.  The Rule changes the terms by which you might be judged for your selection and monitoring of those providing investment advice.

Moreover, although the applicable agencies have indicated that enforcement actions will be limited during the transition period, it is important to be aware that ERISA permits a private cause of action for breach of a fiduciary duty.

Accordingly, if excessive fees are paid due to failure to conform to the Impartial Conduct Standards, then litigation could result. Foresight, planning and compliance are always preferable to being caught unaware by legal conflict.


Understanding the Rule. To assist with your understanding of the Rule, this website also contains a “Flowchart.”  You will note that there are three key distinctions that are important to compliance.

First, is there an “investment recommendation”? A “recommendation” as to an investment decision is advice that is reasonably viewed as suggesting a particular course of action.  If there is no "recommendation” then the Rule will not apply.

“Education” as to the Plan and the implications of the Plan (such as how much income a Participant can defer to maximize tax benefits or employer match) are not investment recommendations. Also merely describing the features and attributes of a particular investment is not a “recommendation” unless a course of action (invest or avoid) is suggested.  The Rule also recognizes that a Participant can “direct” an investment choice without any “recommendation” from an advisor.

Be aware, however, that advice related to whether “roll over” assets from an employer Plan to an IRA is considered a “recommendation.”

Second, is there “compensation” related to the “recommendation”?   An advisor will be obligated to adhere to the Rule only if there is compensation that relates to an investment recommendation.  Such compensation can be direct or indirect, but it must be paid in connection with or as a result of the transaction or service involving a recommendation. If an employee whose regular duties include assisting Participants with Plan issues does not receive any additional compensation related to such assistance, then the Rule will not apply even if the assistance amounts to a “recommendation.”

Finally, what is the nature of the compensation? The Rule provides for two different levels of compliance depending on whether the compensation received by the advisor is considered “level-fee” or “varying based on the particular investment” (such as “commission” or other similar arrangements).

  • If your investment advisor is compensated as a “service provider” for a “level fee,” then the burden of complying with the Impartial Conduct Standards is much easier.
  • If your investment advisor is compensated as a “product-seller” receiving direct or indirect compensation from the “product-provider” as commission or other fees, then the advisor will have the burden of justifying that its advice is objective and prudent, and that its compensation is reasonable.

In both cases, however, the advisor will have a duty to ensure that no misleading statements are made with respect to the recommendation. Also, a recommendation to move from an investment that does not generate fees for the advisor to one that does generate fees will be considered as “varying based on the particular investment” even if the new fees that the arise are on a “level-fee” basis.

When the Rule takes full effect, the requirements for those seeking compensation other than on a “level-fee” basis will become somewhat more onerous, as additional disclosure and contractual obligations (incorporating the Impartial Conduct Standards) will become necessary.


What to Do Next? A prudent Plan Sponsor will be proactive with respect to the application of the Rule to ensure no unexpected issues arise.  We suggest that you consider the following:

  • Examining the internal administration of your Plan or Plans to ensure that no person within your organization is receiving compensation for activity that could be considered investment “recommendations.”
  • Examining the materials available to Participants to ensure that they are “educational” and do not entail “recommendations.”
  • Examining your relationships with all service providers to ensure that any communication that could be considered a “recommendation” is made only by those confirmed as subject to the Impartial Conduct Standards.
  • Examining whether those service providers providing investment “recommendations” are compensated on a “level fee” basis or are compensated by “product providers” in a manner that varies based on the investment chosen.
  • Initiating communication with any service providers who make investment “recommendations” to inquire as to how they intend to conform to the Impartial Conduct Standards.
    • If the advisor intends to receive compensation that varies based on the particular investment, inquiring as to how such advisor will document that such recommendations are objective, prudent and resulting in reasonable compensation.
  • Setting up a process to monitor compliance and ensure that required disclosures are received and contractual requirements agreed to, particularly after the Rule takes full effect on January 1, 2018 or later. Such required disclosures provided to Participants will need to be in a concise and understandable one-page format.   Previous plan advisor agreements that placed disclosures in multiple documents will no longer satisfy the disclosure requirements that are a critical part of the Rule.

Vandenack Weaver LLC attorneys are, of course, happy to assist you with any of these issues and answer any additional questions you may have.


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