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What Are the Requirements of Those Held to a Fiduciary Standard?

by: Smith and Howard

June 27, 2017

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The Department of Labor (DOL) has implemented the first phase of its new Fiduciary Rule, extending the scope of retirement plan fiduciary duties. In part, the Fiduciary Rule aims to mitigate conflicts of interest that arise from financial advisors’ recommendations regarding retirement accounts. Because of the sweeping changes the Fiduciary Rule brings to the financial advice industry, it has been the subject of great controversy. The primary provisions of the Fiduciary Rule took effect on June 9, 2017, though certain exemption provisions will take effect on January 1, 2018.

Those held to a fiduciary standard are legally and ethically required to act in the best interest of another party. Before implementation of the Fiduciary Rule, fiduciary status only applied to employment-based retirement plans such as 401(k) and 403(b) plans. Under the Fiduciary Rule, any financial advisor providing advice regarding a tax deferred retirement account is held to the fiduciary standard. Individual retirement accounts like IRAs and Roth IRAs that were not covered under the previous standard now fall under the Fiduciary Rule. 

Fiduciaries are legally required to act in the best interest of the advice recipient, and those who work with retirement accounts in any capacity must be aware of whether they are a fiduciary and how they might incur fiduciary status. Professionals working with retirement accounts can inadvertently incur fiduciary status by recommending investments or investment strategies. According to the Fiduciary Rule, a professional incurring fiduciary status can be held liable if his or her advice was imprudent or not in the best interest of the recipient. 

Under the Fiduciary Rule, an individual becomes a fiduciary when he or she renders investment advice for a fee or other compensation. On its own this definition is overbroad and vague, so the Fiduciary Rule provides additional guidance as to what is and what is not investment advice. Under the new rule, investment advice includes recommendations regarding specific investments. Investment advice also includes higher level recommendations, such as those regarding investment policy, strategies, and portfolio composition. The definition of investment advice includes recommendations relating to assets within a retirement account. Examples include recommendations to distribute assets or roll over assets from an employer-based retirement plan to an IRA. These recommendations can be formal, such as advice rendered pursuant to a contract, or informal.

The Fiduciary Rule includes some specific exclusions, as well. Because the definition of investment advice includes communications directed at specific recipients regarding an investment or management decision, professionals who do not act in a direct advisory role may incur fiduciary status. Financial educators, investment journalists, and investment platform providers could be adversely affected, so the DOL includes numerous exceptions within the Fiduciary Rule that prevent fiduciary status from applying unintentionally. The most important exemptions included in the rule are highlighted below.

General Communications

The Fiduciary Rule states that communications are not investment advice if a reasonable person would not view the communication as investment advice. The rule provides numerous examples including talk shows, newspaper articles, and speeches. The DOL also specifies that general marketing materials and data describing market performance do not fall within the definition of investment advice.

Platform Providers

The Fiduciary Rule excludes financial service platform providers from fiduciary status, provided they meet certain requirements. Generally, to be excluded the platform provider must offer a neutral investing tool which does not favor certain financial products or investments over others. The platform provider must offer investment funds without regard to an individualized plan need. Financial service platform providers may identify investment options based on objective criteria and provide benchmark comparisons for each investment option. A platform provider’s financial interest in any identified investment options must be disclosed. In addition, those platform providers who are not providing impartial investment advice must disclose this fact in writing.

Investment Education

The most detailed exemption within the Fiduciary Rule concerns investor education. The rule attempts to discourage sales pitches disguised as educational seminars without disrupting neutral, even-handed investor education. Investor education broadly covers retirement plan information as well as general financial investment information. Plan information provided may describe the terms and operation of the plan, such as available distribution options and associated features, risks, and expenses, as well as the impact of increasing contributions and making early withdrawals. Providers of investment education may provide their services without the risk of incurring fiduciary status, provided the educator does not recommend specific investment products, investment alternatives, or other investment property.

The substantial complexities, ambiguities, and implications of the Fiduciary Rule should not be taken lightly by plan sponsors or financial professionals. The rule and its exceptions include far greater nuance than can be addressed in a newsletter. Hall Benefits Law recommends that you seek the advice of ERISA counsel to determine how this rule will affect your company.

Questions? Please contact Lori Wagnon for more information at 404-874-6244 or fill out the contact form below. 

This article by Anne Tyler Hall originally appeared in Hall Benefit Law, LLC’s June 2017 HR Alert. 

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