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DOL Releases Final Regulation Defining Investment Fiduciaries

After years of effort, the Department of Labor released final rules on April 6, 2016, that will substantially alter the way investment advice is provided to ERISA plans, their participants, and even non-ERISA IRAs.

The new regulation changes the way the term “fiduciary” is defined under ERISA and related Tax Code provisions. Along with the regulation, the DOL also issued a new prohibited transaction exemption and modified many others. The purpose of this new regulatory regime is to expand the DOL’s enforcement authority over investment advisors, including those who advise IRA holders. We will explain these rules more thoroughly in a forthcoming White Paper, but they will undoubtedly reshape the retirement industry and its stakeholders – including employers, plan participants, IRA holders, and service providers – for years to come.

The DOL’s first attempt to refine the rules for determining whether someone who provides investment advice is a “fiduciary” came in regulations proposed in 2010. Those proposed rules – which we described in a November 18, 2010, article – were withdrawn a year later, after intense criticism and lobbying from some in the retirement industry.

The DOL issued its second proposal last April, which again received extensive feedback from industry advocates, Congress, and others. According to the Fact Sheet accompanying the final regulation, the DOL took that feedback into account by streamlining the rule and exemptions “to reduce the compliance burden and ensure continued access to advice, while maintaining an enforceable best interest standard that protects consumers.”

Among other things, the final regulatory regime purports to:

  • Require investment consultants to conform to a “best-interest” standard when advising plans and their participants, rather than the less onerous “suitability” standard to which some consultants are held today;
  • Apply ERISA-like standards to consultants who provide advice to non-ERISA IRA holders;
  • Clarify what constitutes fiduciary advice by describing specific kinds of investment “education” that fall short of fiduciary conduct, and by clarifying what constitutes an investment “recommendation”;
  • Make the previously proposed best interest contract (“BIC”) exemption – which will be the primary mechanism by which many advisers will provide advice – more readily available;
  • Grandfather certain existing investment-advice relationships; and
  • Extend the period over which the new rules will become effective.

The final regulation and exemptions adopt a “phased” implementation approach in order to give advisory firms more time to come into full compliance. The broader definition of “fiduciary” will take effect one year from now, in April of 2017. Moreover, to take advantage of the BIC exemption, advisors will be required to comply with only limited conditions (such as acknowledging their fiduciary status and adhering to the best-interest standard) until January 1, 2018, when the exemption’s other requirements will take effect. Until then, we will continue to flesh out the details of this monumental change to the retirement industry.