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Conflict of Interest or Fiduciary Rule: Q&A – Part I

By September 12, 2016No Comments

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After years of proposed regulation issuance, comment periods, drafting and anticipation, the Department of Labor (DOL) finally published final guidance regarding the definition of “fiduciary” on April 8, 2016. It is important for plan sponsors to understand the reasoning behind, and the scope, of the final rules. The following Q&A is meant to assist you in understanding the regulations and how they pertain to you, your plan and your participants.

Q: Why did the DOL issue these new rules?

A: The definition of “fiduciary” for purposes of providing investment advice dates back decades, predating the advent of 401(k) and other defined contribution plans. Prevalent thought within the retirement industry was that the definition was due for an update to reflect the evolution of the retirement plan landscape and to bring more parties under the scope of ERISA’s standard of care for fiduciaries.

Q: Who are the primary targets of the new rules?

A: The primary targets of the new rules are providers of retirement plan services and products. Advisors, consultants, recordkeepers, third party administrators, etc., are those most impacted by the new rules. The primary objective of the regulations is to sweep into the definition of “fiduciary” more individuals and organizations who may influence plans, plan sponsor fiduciaries and participants in regards to investing-related activities. In so doing, these individuals/organizations will be held to the highest standard of care in providing investment advice and recommendations under the terms of ERISA.

Q: In a nutshell, what do the new rules say?

A: Essentially the new rules provide that an individual/organization will be a fiduciary under ERISA if they make a recommendation to a plan, plan sponsor fiduciary (e.g., a plan committee) or plan participant (or beneficiary) regarding investment products/services, distributions or rollovers . . . and they receive a fee for doing so.  “Recommendation” is defined as a communication that can reasonably be viewed as a suggestion that the recipient of the information take (or refrain from taking) some course of action.

Q: In the past I recall hearing that certain providers could not be a fiduciary, does that remain true?

A: In the past, service providers that received uneven, or “conflicted” compensation, would not agree to serve in a fiduciary capacity because they could affect, or influence, their compensation which would have resulted in a prohibited transaction.

Under the new rules, a Best Interest Contract Exemption (the “BIC Exemption”) has been created to account for such scenarios. Additionally under the new rules, all individuals/organizations meeting the definition of fiduciary are going to be treated as fiduciaries, regardless of the design of their compensation. In order to avoid a prohibited transaction, fiduciaries receiving conflicted compensation (such as commissions) can continue such compensation design as long as they meet certain requirements, one of which is to commit to providing recommendations that are in the best interests of the recipient of services/recommendations.

Q: Does our plan fall under the new rules?

A: All ERISA-covered plans that have an investment element will be covered. 401(k), 403(b), profit sharing, money purchase pension and defined benefit plans will all be covered. Interestingly, recommendations for taking a distribution or rolling over to an IRA will also be covered. And an unexpected surprise for most plan sponsors is that health savings accounts (HSAs) are also covered.

Come back tomorrow to read the second part of “‘Conflict of Interest’ or ‘Fiduciary’ Rule: A Plan Sponsor’s Q&A”.

To learn more about the SDM Retirement Plan Services practice, click here. Get in touch with Retirement Plan Services Director Jeff Stephens here to see what SDM Advisors can do for your company’s retirement plan!

Securities and Advisory Disclosure: 
Securities offered through ValMark Securities, Inc. Member FINRA, SIPC. Fee based planning offered through SDM Advisors, LLC. Third party money management offered through ValMark Advisors, Inc a SEC registered investment advisor. 130 Springside Drive, Suite 300, Akron, Ohio 44333-2431. 1-800- 765-5201. SDM Advisors, LLC is a separate entity from ValMark Securities Inc. and ValMark Advisers, Inc.

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