The Department of Labor (DOL) issued the conflicted advice regulation in its final form on April 6. It may have been primarily directed at investment advisors, but plan administrators need to understand what it means and how they will be affected as well. A recent ASPPA webcast discussed exactly that.
Craig Hoffman, general counsel for the American Retirement Association, and David Schultz, attorney and product manager for FIS Relius Wealth & Retirement, summarized the salient provisions of the final rule and the related prohibited transaction exemptions.
“This has been a convoluted kind of process,” said Hoffman, but “the good news is, we have a year before we have to comply.”
Hoffman and Schultz called the final rule just issued an improvement over the version the DOL released one year before, and that it largely adopts the general structure of the earlier iteration, but with modifications that are based on the extensive comments the DOL received about the rule. They said that it was “evident” that the ARA’s comments had an impact on the development of the final rule.
In the webcast, Hoffman and Schultz explained what constitutes conflicted advice under the final regulation, analyzed the changes made from the original proposal, discussed how plan administrators can avoid being classified as a fiduciary and described the most important “carve-outs” and exemptions.
Among the points Hoffman and Schultz raised were the following:
- Making a recommendation regarding management of plan assets and portfolio compensation could put a third party administrator at risk of giving advice and performing a fiduciary act.
- The rule distinguishes between recommendations, which constitute fiduciary advice, and educational or informational materials, which do not constitute fiduciary advice.
- The rule includes a much broader definition of who is considered a fiduciary investment advisor than did the old rules — and as a result more people will be swept in under the definition of fiduciary.
- An engagement contract should make it clear that one is not giving advice.
- A fee or compensation is paid “in connection with or as a result of” advice if it would not have been paid but for the recommended transaction or advisory service or if eligibility for or the amount of the fee or compensation is based on the transaction or service. If you can establish that compensation is “but for,” you’re in a much better position.
- The best interest contract exemption is a method for giving advice to a plan or an IRA and still be compensated.
- “Level-fee” fiduciaries who receive only a level fee for service do not have to enter into a contract, but written acknowledgment of fiduciary status, adherence to fiduciary standards, and written documentation for the reasons for the recommendation are required. The level-fee exemption is one of the examples of provisions for which one can thank the ARA.
The final rule is officially effective on June 8, 2016; however, they note, the date when it actually will be applied is April 10, 2017. Not only that, the BIC exemption becomes effective when the rule becomes applicable, but there is a transition period — so the “full BIC” goes into effect on Jan. 1, 2018.
More to Come?
Hoffman reminded attendees that the rule “remains contentious in Congress,” and pointed out that Congress has 60 days to review the rule and can take action — which could include passing legislation that would tweak or even invalidate the rule. That occurs, however, against the backdrop of a likely presidential veto. But there also remains the possibility that litigation could be set in motion against the rule.
And even the DOL may take action. Hoffman and Schultz said that the DOL acknowledges that additional “sub-regulatory guidance will likely be necessary.” They also expect that the DOL will issue FAQs and similar assistance in applying and complying with the rule, and that the DOL will favor education over enforcement, at least initially.
This webcast will be available through April 14, 2017. The outline is available here.
More on ASPPA’s upcoming and on-demand webcasts is available here.
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