With the new U.S. Department of Labor (DOL) fiduciary rule in effect, and the phased implementation and extended transition period set, it is reasonable to imagine that all members of the retirement plans community have been refreshing their understanding of the fiduciary duties tied to plan administration.
However, recent surveys1 of defined contribution (DC) plan sponsors yielded somewhat alarming results about grasping the role of fiduciary and what duties apply.
Some fiduciaries surveyed were not aware that they were, in fact, fiduciaries, some thought they were able to delegate their responsibilities to a third party, and others were unable to determine which actions are fiduciary versus administrative. In light of the survey results and the impending full implementation of the new fiduciary rule, it seems prudent to revisit the roles and responsibilities of a plan fiduciary and to evaluate the new rule’s impact.
A general web search of the term “plan fiduciary” reveals that the primary responsibility of a fiduciary is to run the plan solely in the interest of its participants and beneficiaries, with the exclusive purpose of providing benefits and paying reasonable plan expenses.
The answer to the question of who is a fiduciary starts with anyone who exercises discretionary control or authority over plan management or plan assets, anyone with discretionary authority or responsibility for plan administration, or anyone who provides investment advice to a plan for compensation. For example, fiduciaries include the plan administrator, which may be the plan sponsor, the plan trustee, and members of the plan’s investment committee.
Under Section 404 of the Employee Retirement Income Security Act (ERISA), a plan fiduciary is held to a prudent-person standard, meaning he or she is required to act with the care, skill, prudence, and diligence that a prudent person acting in a like capacity, familiar with such matters, would use.
To the extent that one is positioned as a fiduciary but not familiar with qualified plan administration, that person should take expeditious steps to understand the responsibilities he or she has been assigned, either through training and education or by researching and hiring accounting, legal, and other professionals with retirement plan expertise. Although hiring an expert is encouraged, and establishes a shared responsibility, it does not permit a complete handoff of the plan fiduciary’s responsibilities under ERISA.
The DOL overhauled the fiduciary rule to expand its protective reach over the investment of plan assets and investment advice rendered to plan sponsors and participants. Although the new fiduciary rule is in effect now, the phased implementation period for certain exemptions has been extended to July 1, 2019, from January 1, 2018, while the DOL further reviews the law and its effects at the behest of the Trump administration.
As a result, the agency has confirmed that no claims will be filed against fiduciaries who were working diligently and in good faith to comply with the fiduciary rule and exemptions, and that it would not treat those fiduciaries as violating the rule and exemptions during the phased implementation period.
The information most likely to be received by a 401(k)-plan fiduciary that would invoke the fiduciary rule is investment recommendations. Investment information is subject to the rule in the form of recommendations from an investment adviser or investment consultant regarding the purchase, sale, and management of investments, as well as an investment strategy.
The recommendation rises to the level of investment advice when it is issued by a party that has acknowledged that he or she is acting as a fiduciary, if the plan administrator reasonably understands that the recommendation is customized for the plan’s particular objectives, or if the adviser directly or indirectly receives a fee or other compensation from any source that is connected to, or as a result of, the recommendation.
In the same vein, an investment recommendation should be vetted for possible conflict-of-interest concerns. A potential conflict of interest exists when an adviser recommends an investment from his or her financial institution’s own inventory, or from an affiliate, or when additional compensation is tied to the recommended investment.
Plan fiduciaries will want to examine existing provider relationships and identify any related affiliates, as well as inquire as to any direct or indirect compensation arrangements for the plan’s investment line-up.
The DOL has provided a few prohibited transaction exemptions (PTEs) that allow an otherwise-questionable transaction to take place when certain requirements are satisfied. These primarily are the Best Interest Contract Exemption and the Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs (collectively known as “the exemptions”).
When effective under the new fiduciary rule, or after July 1, 2019 under the current extension, the exemptions collectively will require a variety of disclosures related to fees, services, and conflicts of interest, a contract between the parties, and a written policies and procedures warranty that mirrors the requirements of the exemption. They also demand a promise to adhere to the “impartial conduct standard” and express acknowledgment of fiduciary status.
In the interim, though, the impartial conduct standard will satisfy the exemption. Specifically, investment advice should meet the professional standard of care and must be based on the interests of the plan and its participants rather than the financial interests of the adviser or his or her firm. In addition, the adviser is to charge no more than reasonable compensation and make no misleading statements about investment transactions, compensation, and conflicts of interest.
The exemption requirements are designed to provide transparency for plan fiduciaries and clarify the type of information needed to flush out proprietary relationships and the flow of compensation. Both are critical in uncovering any conflict of interest in a particular investment transaction. It is advisable for plan sponsors to review their existing and new plan investment agreements for inclusion of these and related terms.
In the second part of this article, we’ll focus on the exception to the fiduciary rule, as well as some steps employers can take to ensure the new DOL fiduciary rule is being properly adhered to.
1Surveys were conducted by AllianceBernstein, Cerulli Associates, Callan LLC, J.P. Morgan Asset Management, PLANSPONSOR.
|Arris Reddick Murphy is an attorney with experience in the employee benefits and executive compensation practice area, and she is senior counsel with FedEx Corp.’s Tax & Employee Benefits Law group. Before joining FedEx, she held the position of associate with the law firm of Potter Anderson & Corroon, LLP, and worked in-house with The Vanguard Group and the City of Philadelphia as counsel to its Board of Pensions and Retirement. She is contributing editor of The 401(k) Handbook.|