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[Source: R. David Wentz, J.D., CHFC, Tax Favored Benefits, Inc., 07.2016 | Keywords: DOL, Employee Benefits, Retirement]

On April 6, 2016 the Department of Labor released a new regulation generally referred to as the “Fiduciary Rule” which, under Employee Retirement Income Security Act of 1974, as amended (“ERISA”), will serve to significantly expand the activities which determine whether one is considered a Fiduciary by providing “investment advice” with the resulting duties and responsibilities. The final rule is not applicable until April 10, 2017 with a transitional period for full compliance running until January 1, 2018.

The Fiduciary Rule applies to all ERISA-covered benefit plans with an investment component so it will cover recommendations and operation of qualified plans such as 401(k), profit sharing, pension and certain 403(b) plans.

It also covers plan roll outs into an IRA and certain health plans with investment features such as Health Savings Accounts. What it does not cover is most insurance policies sold to health and welfare plans.

While the Fiduciary Rule primarily focuses on providers of retirement plan products and services it will certainly affect employers and plan sponsors. Since the release of the Fiduciary Rule is very recent and is principle based, the analysis of its content is not yet complete and will probably undergo a change in operation and interpretation in the months and years to come.

Essentially, the financial institution (registered investment advisor, bank, insurance company, broker dealer) is responsible as a fiduciary for recommendations made by any plan advisor regarding investments in securities and annuities. The fiduciary plan sponsors (employer) still have a duty of loyalty to participants and beneficiaries, including the selection and monitoring of plan service providers and financial institutions.

Participant education remains vital to the success of a retirement plan. The Fiduciary Rule generally allows plan sponsors and service providers to continue providing investment education to participants without becoming investment advice fiduciaries. Non-fiduciary education includes general information about a plan; general financial investment and retirement information; hypothetical asset allocation models; and interactive investment materials. These may identify specific designated products or investment alternatives under the plan so long as they also identify any other alternatives offered that have similar risk and return characteristics and where the participant may obtain additional information.

Employees of a plan sponsor will not be considered to render fiduciary investment advice so long as 1) he or she does not receive compensation in connection with such advice outside normal compensation from the employer and 2) his or her job is not specifically designated to provide investment recommendations to plan participants.

The new rule can be expected to affect the relationship between service providers and plan sponsors. Some service providers will probably provide new disclosures and plan sponsors will be asked to make new representations and warranties in connection with particular transactions and investments. Some may operate under an exception to fiduciary status. Other service providers may elect to accept ERISA fiduciary status and comply with the new Best Interest Contract Exemption (BICE).

What is the Best Interest Contract Exemption?

The Best Interest Contract Exemption (or BICE) allows for the receipt of otherwise prohibited compensation, specifically, commissions and third party compensation tied to recommendations made to an Investor (ERISA Plan or IRA) regarding any security or investment property. In order to use BICE, the financial institution must acknowledge that it will be a fiduciary and that the individual adviser’s recommendations will be in the Investor’s best interest. For IRA’s, the contract needs to be executed at time of transaction; for ERISA plans, no contract is required, but many of the same compliance and disclosure requirements exist. Among many other compliance requirements, as always, the compensation must also be reasonable.

What does the DOL mean by “best interest” and “reasonable?”

It remains to be seen how these terms will ultimately be interpreted. The DOL defines “best interest” as a scenario in which the adviser and financial institution providing the advice act with care, skill, prudence and diligence, under the circumstances then prevailing, that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, based on the investment objectives, risk tolerance, financial circumstances and needs of the retirement investor, without regard to the financial or other interests of the adviser, financial institution or any affiliate, related entity, or other party.

The DOL has been less specific about the definition of “reasonable.” Reasonableness is likely to be determined based on the advice given; the scope of the services; the frequency of the meetings; and perhaps even the experience and expertise of the adviser and financial institution. The DOL has suggested that compensation can vary by product or service, but that the financial institution’s policies, procedures and incentive practices must be “reasonably” and “prudently” designed to avoid a misalignment of the interest of the advisers and their Investors.

While the effective date and transition period for the new Fiduciary Rule and its related prohibited transaction exemptions are not immediate, it is important for plan sponsors and employers to begin considering its potential impact.

Please note that the subject matter in this article is intended as general education and presented here with the understanding that the author and Tax Favored Benefits, Inc. are not providing legal or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal or tax advice.

Securities and investment advisory services are offered solely through Ameritas Investment Corp. (AIC). Member FINRA/SIPC. AIC and Tax Favored Benefits, Inc. are not affiliated. Additional products and services may be available through R. David Wentz or Tax Favored Benefits, Inc. that are not offered through AIC. Securities email: rdw@taxfavoredbenefits.com.