The U.S. Department of Labor (DOL) is preparing to move forward with a regulatory change that would expand the definition of fiduciary investment advice, holding service providers and plan sponsors accountable to the regulations included in the Employee Retirement Income Security Act of 1974 (ERISA). The bulk of the rule change, which was scheduled to take effect in April, will be implemented on June 9, as the DOL ordered a 60-day delay.
"For some time the DOL has been considering expanding the definition of fiduciary advice," said Lori Shannon, a partner in law firm Barnes & Thornburg's corporate practice who focuses on employee benefits and executive compensation. "The reason why is because ERISA is old and when it was originally put in place, the concept of fiduciary investment advice was geared more toward traditional plans."
According to Shannon, DOL's rule change is designed to require service providers acting as a fiduciary – that is, giving particular investment advice to plan participants – to act in the best interests of their clients. If there is a conflict of interest, the provider must meet certain exemptions or refrain from offering fiduciary advice altogether.
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"The DOL has now said any investment advisor will be held to fiduciary standard," said James Olson, legal counsel at Schnader Harrison Segal & Lewis. "Anyone who offers investment advice to a plan participant or an IRA holder must put their clients' best interest ahead of themselves; they cannot generate profits where there might be a conflict of interest."
The rule change doesn't only put the onus on service providers, however. Plan sponsors, namely businesses, need to take certain measures to ensure they're protected from significant financial penalties. According to Shannon, this includes thoroughly reviewing educational materials offered by the service provider, combing through the contract to understand whether fiduciary advice will be offered or not, and regularly ensuring that, if a service provider doesn't claim to offer fiduciary advice, they are indeed refraining from doing so.
"The thing a plan sponsor needs to be concerned about is 'is this fiduciary investment advice?'" Shannon said. "The provider either is a fiduciary advisor or they aren't, so make sure the documentation is consistent with [the service provider's] declaration."
Penalties for noncompliance come in the form of lawsuits, fines and excise taxes, which are tied to the size and scope of the transaction found to be in violation of the rules. Here's what plan sponsors and service providers should understand:
Plan sponsors: Avoid opening yourself to any fiduciary liability. For plan sponsors found not acting in the best interest of plan holders (typically their own employees), onerous penalties apply.
Service providers: If you are receiving compensation for fiduciary advice but don't meet the new rules regarding one of the exemptions, significant penalties and excise taxes will apply. Clients also will have the opportunity to file suit if a service provider is found to not be acting in their best interests.
The full fiduciary rule can be found on the DOL's website, including the new changes, exemptions and information regarding financial penalties for noncompliance.