Our colleague Jason Levy recently published an article in The Actuary Magazine on the Department of Labor’s fiduciary conflict rule.  More than six years in the making, this rule represents perhaps the most significant regulation from the DOL during the Obama Administration.

The fiduciary conflict rule expands the definition of fiduciary to cover, with certain exceptions, all investment advice provided to a retirement plan (like a 401(k) plan, defined benefit pension plan, or an IRA), or to a participant or beneficiary in any of those retirement plans.  The rule imposes fiduciary status on a broad category of professionals, including many broker-dealers who previously had taken the position that they were not investment advice fiduciaries based on a DOL regulation that had been in place since 1975.

In contrast to the sweeping changes it imposes on investment advice professionals, the fiduciary conflict rule will have a far more modest effect on employers.  The rule is not intended to confer fiduciary status on sponsors of retirement plans.  Likewise, there had been concern under the proposed version of the rule that human resources and other employees who interact with participants might be considered fiduciaries when they discuss retirement plan investments with their co-workers.  However, the final version of the rule provides that, absent unusual circumstances, such employees would not be covered.

Nevertheless, the fiduciary conflict rule has important implications for employers that sponsor retirement plans.

  • Potential Impact on Plan Fees. In one of the most significant departures from previous DOL guidance, recommendations on distributions, including rollovers into an IRA or transfers to another plan, can constitute fiduciary investment advice under the new rule.  By regulating these distributions, the fiduciary conflict rule may have the practical effect of slowing the outflow of assets from well-run employer-sponsored retirement plans and thereby increasing the amount of assets they otherwise hold.  With larger plan assets, plans may have increased bargaining power to negotiate more favorable investment terms and reduced vendor fees.  However, as a countervailing consideration, a reduction in IRA rollovers may decrease lucrative asset flows to affiliates of the plan’s recordkeeper  which, in turn, may lead the recordkeeper to try to recover the lost revenues by increasing the fees it charges the plan for recordkeeping and other related services.  While it is too soon to know the overall impact of these developments, plans should closely monitor how best to extract favorable terms in light of the short- and long-term changes to the marketplace caused by the fiduciary conflict rule.
  • New Oversight Responsibilities. Employers and plan administrators should create new procedures to monitor their service providers’ compliance with the fiduciary conflict rule.  For example, service providers should be periodically monitored to ensure that their educational materials are “unbiased and not designed to influence investment decisions toward particular investments” that may result in higher compensation for the service provider.  Additionally, employers should take reasonable measures to ensure that service provider call center employees do not provide fiduciary investment advice under the rule’s expanded definition of fiduciary, absent a fiduciary arrangement that is specifically structured to provide such advice.
  • Review of Service Provider Contracts. Service providers who previously took the position that they were not investment advice fiduciaries may find their fiduciary status change under the new rule.  For example, firms that provide investment management advice concerning a plan’s portfolio composition or recommendations on a plan’s investment policies must take on fiduciary status once the rule is applicable.  Companies that sponsor retirement plans should review agreements with such third party investment advisers (and other service providers) to ensure that the agreements’ terms are consistent with the new rule.

For additional details on these takeaways, as well as a discussion on the architecture of the fiduciary conflict rule and the Best Interest Contract or so-called “BIC” exemption, please see Jason’s article in The Actuary Magazine.