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New U.S. DOL Rule Revamps ERISA Fiduciary Definition

GDA partner Wile Consulting Group - UBS explains new rule in effect on April 10, 2017.
Note: As of February 2017 the law has been delayed for revisions for 180 days. There may be some changes made in this time-frame but we at Wile Consulting Group-UBS still predict it to go into effect. 

The Department of Labor’s final Fiduciary Rule broadens ERISA’s fiduciary “investment advice“ definition, provides limited exceptions from fiduciary status, and substantially revises the ERISA prohibited transaction exemptions available for fiduciary investment advice.

The U.S. Department of Labor (DOL) released in April its final rule, “Definition of the Term ’Fiduciary’; Conflict of Interest Rule—Investment Advice“ (the “Rule“). The Rule expands the scope of who becomes a fiduciary through giving “investment advice“ for purposes of the Employee Retirement Income Security Act (ERISA) standards of fiduciary conduct and prohibited transaction rules.

Most parts of the Rule and related exemptions become effective on April 10, 2017. Once effective, the Rule will profoundly affect how members of the financial services industry provide services to ERISA plans and plan participants. Below is a summary of the Rule and its key features.

The reason for the Rule is the DOL’s concern about the impact of conflicts of interest on retirement investors. According to the DOL, the prior rule’s so-called “five-part test“ as to what constitutes fiduciary investment advice permitted too many firms providing investment-related advice to avoid fiduciary standards. DOL’s announcement of the Rule emphasized the goal of requiring those providing retirement investment advice to place their clients’ best interest before their own profits.

For a person to become an “investment advice“ fiduciary under ERISA means that the person becomes subject to the ERISA fiduciary responsibility rules, including the duty to act prudently and the duty of loyalty, and—more importantly—the strict prohibitions on fiduciary self-dealing and conflicts of interest under the ERISA prohibited transaction rules.

A fiduciary violating these rules can be personally liable for a plan’s resulting losses or the fiduciary’s illicit profits, and can also be subject to DOL civil penalties of up to 20% of the amount recovered if the DOL is involved in a lawsuit or settlement. In addition, the fiduciary engaging in a prohibited transaction is subject to excise taxes of 15% of the amount involved in the transaction per year until correction, and a possible 100% excise tax if the prohibited transaction is not corrected.

Definition of Fiduciary Investment Advice
The Rule revises the former five-part test into two prongs. First, the potential investment advice fiduciary must be providing a “recommendation.“ While this was also a factor under prior law, the Rule broadens the scope of what constitutes a recommendation in connection with rollovers and distributions—now including recommendations as to whether, in what amount, in what form, and to what destination a rollover or distribution should be made. In addition, the Rule now covers recommendations on the selection of investment account arrangement types (e.g., brokerage versus advisory) and investment managers.

Also, while the law previously did not define the term “recommendation,“ the Rule now broadly defines a “recommendation“ as a communication that would “reasonably be viewed as a suggestion“ that a person engage in or refrain from a particular course of action. It also states that “a series of actions“ may together amount to a “recommendation.“ Thus, a communication that, standing on its own, may not be viewed as a “recommendation“ could become a “recommendation“ when viewed in conjunction with other interactions, actions, and transactions with the client.

The second part requires that the recommendation be made by a person who either (1) represents or acknowledges that he or she is acting as an ERISA or Code fiduciary, (2) provides the advice pursuant to a written or verbal agreement, arrangement or understanding that the advice is based on the particular investment needs of the retirement investor (no longer requiring a “mutual agreement“ as under prior law), or (3) directs to a specific recipient the advice regarding the advisability of a particular investment or management decision.

The overall impact of these changes is to take conduct that was previously not viewed as fiduciary in nature—discussions of distributions, rollovers, and sales of particular investment products and services—and now subject that conduct to ERISA fiduciary standards. There is a so-called “hire me“ exception for selling one’s own services, but it is not clear how far that extends.

The law also contains a third requirement for investment advice to result in fiduciary status—that the investment advice be for a direct or indirect fee or other compensation. The DOL has historically taken a broad view of what qualifies as a fee or other compensation for this purpose.

Thank you to GDA Plus+ partner UBS Financial Services, Inc.,/Wile Consulting Group for providing this update on a rule that will now deem any financial advisor who gives investment advice for an ERISA-covered vehicle (401k, Profit Sharing Plan, etc.) to be a “fiduciary," including brokers, registered investment advisors, and insurance agents.

Members with concerns regarding this rule and their retirement plans are invited to call our GDA partner at (404) 760-3000 or email