April 2015 HR Alert | DOL Issues New Proposed Fiduciary Standard



HR Alert
April 2015

On Tuesday, April 14, 2015, the Department of Labor (DOL) released the new proposed fiduciary standard (the “Proposed Rule”). The DOL originally proposed a new fiduciary standard in 2010 (the “2010 Rule”). However, the 2010 Rule did not include an economic analysis on the need for the rule and its likely impact. The DOL also did not include any specific exemptions as part of the 2010 Rule. Consequently, in September 2011, the DOL decided to withdraw the 2010 Rule and consider comments and testimony received during the public comment and hearing period. The DOL has indicated that the Proposed Rule reflects careful consideration of such comments and addresses key concerns about the 2010 Rule.

Why a New Fiduciary Standard?

Earlier this year, the White House released a Fact Sheet* outlining the necessity for a new fiduciary standard for retirement advisors. According to the White House, bad retirement advice results in $17 billion in losses every year for working families and an average one percent lower return on retirement savings. Noting that the rules governing retirement advice have not been updated in nearly 40 years, the White House intends for the Proposed Rule to modernize the rules on retirement advice and set new standards.

What are the Substantive Changes Under the Proposed Rule?

According to the DOL, the Proposed Rule is an improvement upon the 2010 Rule for the following reasons:
  • It provides a new, principles-based exemption that can accommodate and adapt to the broad range of evolving business practices. Industry commenters emphasized that the existing exemptions are too rigid, leading to a patchwork of exemptions narrowly tailored to meet specific business practices and unable to adapt to changing conditions. The best interest contract exemption allows certain investment advice fiduciaries, including broker-dealers and insurance agents, to receive various forms of compensation such as brokerage or insurance commissions,12b-1 fees and revenue sharing payments that, in the absence of an exemption, would not be permitted under ERISA and the Internal Revenue Code. The best interest contract exemption represents a departure from the DOL’s approach to prohibited transaction exemptions over the past 40 years and is intended to give the financial services industry the flexibility to determine how to serve their clients' best interest. 
  • It includes a carve-out from fiduciary status for providing investment education to IRA owners. The 2010 Rule provided a carve-out to plan sponsors and participants. The Proposed Rule expands the fiduciary status carve-out to those providing investment education to IRA owners. It also updates the definition of education to include retirement planning and lifetime income information.
  • It determines who is a fiduciary based not on title, but on advice rendered. Under the 2010 Rule, anyone who was already a fiduciary under ERISA for other reasons or who was an investment adviser under federal securities laws would be an investment advice fiduciary. The Proposed Rule evaluates whether the person is providing retirement investment advice rather than his or her title.
  • It limits the seller’s carve-out to sales pitches to large plan sponsors with financial expertise.  The 2010 Rule included a carve-out from fiduciary status for sales pitches to IRA investors, plan participants, and plan sponsors. The Proposed Rule limits this carve-out to large plans and money managers. According the DOL, this change is in response to concerns that differentiating investment advice from sales pitches is difficult in the context of investment products, and, unless the advice recipient is a financial expert, the carve-out would create a loophole that would fail to protect investors.
  • It expressly treats rollovers and distribution recommendations as fiduciary investment advice. In the 2010 Rule, the DOL sought comments on whether rollover and distribution recommendations should be treated as fiduciary investment advice. The Proposed Rule does so in response to comments that continuing to exclude these types of recommendations from fiduciary protections would leave millions of individuals vulnerable to conflicted advice on one of the most significant financial decisions they make.
  • It includes other new carve-outs from fiduciary status for swap transactions with independent plan fiduciaries, mandatory plan reporting and disclosure filings, and certain communications with plan fiduciaries by the plan sponsor’s employees.  
Following the release of the Proposed Rule, there will be a 75-day public comment period followed by a public hearing period. Upon review of all comments on the Proposed Rule, the DOL will decide what to include in the final rule. The DOL has indicated that once the final rule has been issued, it will not go into effect immediately.

For a copy of the text of the Proposed Rule, visit http://www.dol.gov/ebsa/pdf/conflictsofinterestproposedrule.pdf

* For a copy of the White House Fact sheet, visit https://www.whitehouse.gov/the-press-office/2015/02/23/fact-sheet-middle-class-economics-strengthening-retirement-security-crac

This HR Alert was written by:
Anne Tyler Hall
ERISA & Benefits Attorney
3355 Lenox Road
Suite 750
Atlanta, GA 30326
(678) 439-6236 (office)
(404) 861-7441 (cell)

Specializing in retirement plans, health and welfare benefits, and executive compensation law

This HR Alert is intended to provide a summary of significant developments to clients and friends. It is intended to be informational and does not constitute legal advice regarding any specific situation. This material may also be considered attorney advertising under rules of certain jurisdictions.

Copyright © 2015 Hall Benefits Law, All rights reserved.
Email Marketing Powered by Mailchimp