Category Archives: Recordkeeper

Best Practices for Plan Sponsors #12

Lessons Learned from Litigation (#5)—The Johns Hopkins Case

This is the twelfth in a series of articles about Best Practices for Plan Sponsors. To be clear, “best practices” are not the same as legal requirements. Instead, they are about better ways to manage retirement plans. In many cases, though, “best practices” also are good risk management tools because they should exceed legal standards, address areas of concern, or anticipate future developments as retirement plans and expectations evolve.

Plan sponsors should be aware of the latest trends in fiduciary litigation to help manage the risk of being sued and, if sued, the risk of being liable. In my past four plan sponsor posts, Best Practices for Plan Sponsors #8, #9, #10 and #11, I discussed the lessons learned from the conditions in the settlement agreements for the Anthem, Vanderbilt, BB&T and ABB cases. This article—about the Johns Hopkins settlement agreement—is another example of the importance of using appropriate share classes and the monitoring of compensation of service providers . . . and more.

Continue reading Best Practices for Plan Sponsors #12


Best Practices for Plan Sponsors #7

Plan Success by the Numbers (Part 1)

This is the seventh of the series about Best Practices for Plan Sponsors.

Most companies have budgets for their business operations . . . and then regularly compare budget-to-actual. In other words, they compare their actual expenses to the budgeted amounts to see if they are on track to accomplish their financial goals. That’s pretty standard, and there is nothing remarkable about it. But, why don’t plan sponsors and fiduciaries, for example, plan committees, use that same approach for their 401(k) plans? I have a theory about that. But, before I explain my theory, let me say that I believe that plan committees should have budgets, or goals, and should measure their success in reaching those goals.

My theory is that 401(k) plans don’t set goals for plan success because 401(k) plans were originally viewed as the “employees’ plan.” The idea was that employees could do what they wanted to do, since the plan was a supplemental savings plan. That approach made sense when pension plans were more popular. However, now that 401(k) plans have become the primary retirement plan for most employers and employees, it seems fairly obvious that the burden of success of 401(k) plans needs to fall primarily on employers and fiduciaries.

Continue reading Best Practices for Plan Sponsors #7


Interesting Angles on the DOL’s Fiduciary Rule #89

The 5th Circuit Decision, Prohibited Transactions, and New Non-Enforcement Policies

This is my 89th article about interesting observations concerning the Department of Labor’s (DOL) fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions and related developments in the securities laws.

On Monday, May 7th, the Department of Labor and the Internal Revenue Service issued non-enforcement policies for prohibited transactions that resulted from the 5th Circuit Court of Appeals vacating the Fiduciary Rule. While it is well-understood that the 5th Circuit threw out the expanded definition of fiduciary advice, it is not as well known that the 5th Circuit also vacated the exemptions that were associated with the fiduciary regulation. As a result of the loss of the exemptions, including the Best Interest Contract Exemption (BICE), many advisors (including their broker-dealers and RIAs) have inadvertently engaged in prohibited transactions during the time since the Fiduciary Rule first applied on June 9, 2017. As a result, relief was needed. This article discusses the guidance from the DOL and IRS, as well as some of the implications.

As background, when the expanded definition of fiduciary advice became applicable on June 9th, that meant that almost any person providing investment, insurance, or rollover advice to ERISA retirement plans, participants or IRA owners was a fiduciary. As a result, two fiduciary prohibited transaction rules come into play. Two types of compensation are prohibited by both the Code and ERISA. Generally stated, the first prohibited transaction is the receipt of compensation by a fiduciary advisor (and/or the supervisory entity) from third parties. Broadly stated, “third parties” includes anyone other than the plan, plan sponsor, participant, participant’s account, IRA or IRA owner. As a result, it would include common payments such as 12b-1 fees, insurance commissions, payments from custodians and recordkeepers, and so on. The second fiduciary prohibited transaction is commonly referred to as “variable” compensation. More specifically, it is compensation received directly as a result of an investment recommendation. The most obvious example is a commission on a securities transaction, where each recommendation can generate compensation for the advisor. It would also include situations where, for example, a level fee advisor recommended mutual funds that pay 12b-1 fees in addition to the advisory fee.

The compensation resulting received by a fiduciary advisor because of those recommended transactions is prohibited. That compensation can only be retained by a fiduciary advisor (and his or her supervisory entity) if there is an exemption and if the conditions of the exemption are satisfied.

BICE fulfilled that role for most types of transactions. However, when the 5th Circuit Court of Appeals vacated the Fiduciary Rule, it also vacated the exemptions, including BICE.

As a result, there have been an unimaginable number of prohibited transactions committed during the period from June 9th to date. In addition, there would be absolute prohibitions on those types of compensation in the future. Obviously, that doesn’t work.

As a side note, these prohibitions apply only to fiduciary advisors. When the Fiduciary Rule was vacated, some advice that would have been fiduciary advice will not result in fiduciary status. For example, the recommendation of a fixed rate annuity as an individual retirement annuity (or IRA) could be one-time advice. In that case, the commission would not be prohibited compensation, either retroactively or prospectively.

However, in many other cases, the advice would, either under the vacated new rule or the old fiduciary definition, be fiduciary advice. For example, common practices of many investment advisors and RIAs would satisfy the 5-part test. In addition, where advisors with broker-dealers have ongoing relationships of trust and confidence with continuing customers, they could satisfy the 5-part test, depending on the facts and circumstances.

With that background, let’s turn to the non-enforcement policies. The DOL non-enforcement policy applies to fiduciary advice to ERISA-governed retirement plans and to participants in those plans. The policy is that the DOL will not enforce inadvertent prohibited transactions that occurred because fiduciary advisors complied with the transition rules in BICE (and other exemptions associated with the Fiduciary Rule by satisfying the Impartial Conduct Standards). However, that is only partial relief. That is because ERISA also provides for private rights of action by plan fiduciaries. As a result, fiduciary advisors need the additional protection of a prohibited transaction exemption. While that exemption does not exist now, the DOL is likely to remedy that. See the discussion below.

The IRS non-enforcement policy applies to both IRAs (and similar vehicles) and tax-qualified plans. In this case, the relief for IRAs is virtually complete, since only the IRS can enforce violations of the Code.

The non-enforcement policy requires that a fiduciary advisor (and the supervisory entity) comply with the Impartial Conduct Standards (which are, in effect, the conditions in the transition rules for BICE). The ICS includes the best interest standard of care.

The DOL also suggested that it is working on a proposed and temporary exemption that will be retroactive to June 9th of last year and that will be prospective—until there is a final exemption. However, it will likely take a few months before the DOL can draft and propose the exemption. Then, there will be a comment period and the final exemption would be issued later . . . perhaps much later. The delay in the final exemption is because, in all likelihood, the DOL will want to incorporate the provisions of the SEC’s proposed Regulation Best Interest. However, it is highly unlikely that the DOL would incorporate those conditions without seeing the final SEC Regulation.

That’s why the Department will issue the new exemption both as proposed and temporary relief. A “temporary” exemption is effective while the proposed regulation is being reviewed and finalized. This relief is needed. It will, for the time being, allow business to go forward while the SEC and the DOL work on their new rules.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.


Interesting Angles on the DOL’s Fiduciary Rule #74

One More Fiduciary Issue for Recordkeepers

This is my 74th article about interesting observations concerning the Department of Labor’s (DOL) fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions and related developments in the securities laws.

In my last four posts, Angles 70 through 73, I discussed issues and opportunities for recordkeepers under the new fiduciary rule and the transition Best Interest Contract Exemption. This post covers a carve-out to the fiduciary definition that probably will not work—or, at least, won’t work effectively—for recordkeepers.

That carve-out to the fiduciary definition is one that allows recordkeepers to provide lists of the investments available on their platforms that satisfy certain criteria specified by the plan sponsor, for example, performance, expense ratios, volatility, etc. Specifically, that provision says that a recordkeeper does not become a fiduciary by:

Identifying investment alternatives that meet objective criteria specified by the plan fiduciary (e.g., stated parameters concerning expense ratios, size of fund, type of asset, or credit quality), provided that the person identifying the investment alternatives discloses in writing whether the person has a financial interest in any of the identified investment alternatives, and if so the precise nature of such interest; . . .”.

At first blush, that raises a practical question of whether plan sponsors who aren’t working with advisors have the ability to select appropriate criteria. Fortunately, the DOL permits recordkeepers to provide information to plan sponsors about generally accepted criteria. So, that hurdle can be cleared.

Similarly, in a FAQ, the DOL permits recordkeepers to use the criteria in an investment policy statement and provide the plan sponsor with the list that those criteria produce, without the recordkeeper becoming a fiduciary for that purpose.

In that regard, the FAQ states:

The recordkeeper would not be treated as making a recommendation for purposes of the Rule if it provided a list of all of the investment alternatives available on the platform that meet the requirements of the plan’s investment policy statement.

The recordkeeper must apply the criteria to all of the investments that are available on its platform and then report the results. As you might imagine, that could, depending on the criteria selected by the plan sponsor, be a list of just a few funds or a list of hundreds of funds.

Unfortunately, if the recordkeeper further winnows the list of investments produced by the application of the generally accepted criteria or the IPS criteria, the recordkeeper could become an investment fiduciary. In that regard, the DOL has said:

However, if the recordkeeper exercises discretion in narrowing the response to a selective list of investment alternatives, in the Department’s view, the communication could constitute an investment recommendation for purposes of the Rule if a reasonable person would view the communication as a recommendation that the fiduciary choose investments from the selective menu screened by the recordkeeper.

My view is that this carve-out may not be particularly helpful . . . because recordkeepers cannot provide selective lists without running the risk of becoming fiduciaries. As a result, recordkeepers that do not want to be fiduciaries are likely to provide investment line-ups to advisors through wholesalers (see Angles #72) and through responses to RFPs and RFIs as described in Angles #73.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.



Interesting Angles on the DOL’s Fiduciary Rule #73

Recordkeeper Investment Support for Plan Sponsors

This is my 73rd article about interesting observations concerning the Department of Labor’s (DOL’) fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions and related developments in the securities laws.

In Angles article #70, I discussed three areas where the fiduciary rule is impacting recordkeepers. Those are: acceptance of fiduciary status; non-fiduciary investment services for advisors; and non-fiduciary investment services for plan sponsors. Angles articles #71 and #72 discussed the first two points. This article discusses the third.

In the past, recordkeepers often provided sample line-ups to start-up plans and to existing plans that were transferring to their recordkeeping platform. However, under the new fiduciary definition, a selective list of investments is considered to be fiduciary investment advice, which means that the recordkeeper would need to make prudent recommendations and would be subject to ERISA’s prohibited transaction rules (e.g., for any proprietary investments and revenue sharing). Fortunately, there is an exception in the fiduciary regulation; unfortunately, though, the scope of the exception is limited. Let me explain.

The DOL’s fiduciary regulation—which applied on June 9, 2017—expands the definition of fiduciary advice. However, it also includes “carve-outs,” or exceptions, from the fiduciary definition. One of those exceptions is that fiduciary advice does not include a line-up of investments that is provided:

“ . . . In response to a request for information, request for proposal, or similar solicitation by or on behalf of the plan, identifying a limited or sample set of investment alternatives based on only the size of the employer or plan, the current investment alternatives designated under the plan, or both, provided that the response is in writing and discloses whether the person identifying the limited or sample set of investment alternatives has a financial interest in any of the alternatives, and if so the precise nature of such interest; . . .”

As a result, a recordkeeper can provide a plan sponsor with a sample list of investments (for example, for a 401(k) plan) without becoming an investment advisor fiduciary. However, the investment line-up can only be based on the size of the employer or the size of the plan, the plan’s current investment alternatives (if it is an existing plan), or both. In other words, the line-up cannot be customized for the particular plan (by, e.g., taking into account other factions). If it is customized, that would be fiduciary investment advice.

In addition, the sample line-up must be:

  • In response to a request for information, request for proposal, or similar solicitation by or on behalf of the plan.
  • In a written form which discloses whether the recordkeeper has a financial interest in any of the investments in the line-up and, if so, the precise nature of the interests must be described. That would include any proprietary investments and any investments that pay revenue sharing to the recordkeeper.

The sample list is limited to line-ups that would generally be proposed for plans or employers of a particular size (or be based on the line-up of an existing plan) and, therefore, would be of limited value to many plans, this RFP/RFI exception will likely provide some value to small, start-up plans which are serviced by advisors with little or no 401(k) experience and to plans that do not have advisors.

However, where plans do have advisors (even if they have limited experience with plans), the better approach would probably be the wholesalers exception, which was discussed in a prior post, Angles article #72.

Interestingly, if a recordkeeper goes beyond the limits of the RFP/RFI exception (for example, customizes the investment line-up), the recordkeeper will be a fiduciary to the plan, which implicates both the fiduciary standard of care and the prohibited transaction rules. Since recordkeepers commonly receive revenue sharing from a plan’s investments and, therefore, engage in prohibited transactions, they would need to comply with the transition rules for the Best Interest Contract Exemption. Those rules are: adherence to the best interest standard of care; receipt of no more than reasonable compensation; and not making materially misleading statements. For the duration of the transition period (until July 1, 2019), those requirements do not appear to be insurmountable. As a result, some recordkeepers may decide to provide fiduciary investment advice to plan sponsors, rather than use the RFP/RFI carve-out. To this point in time, though, I haven’t seen a movement in that direction.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.




Interesting Angles on the DOL’s Fiduciary Rule #72

Advice to Advisors: The “Wholesaler” Exception

This is my 72nd article about interesting observations concerning the Department of Labor’s (DOL) fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions and related developments in the securities laws.

In my Angles post #70, I discussed three issues for recordkeepers related to the fiduciary rule and exemptions. Angles #71 discussed the financial wellness programs developed by some recordkeepers. This article covers investment advice to advisors.

It is common knowledge that the recommendation of investments to a plan sponsor (that is, to a plan fiduciary such as a 401(k) committee) is fiduciary advice. However, it is less known that, under the new rules, investment recommendations made to fiduciary advisors is also considered fiduciary advice. And, since virtually every advisor to a plan, participant or IRA is now a fiduciary, that means that the presentation of sample investment line-ups to advisors can be fiduciary investment advice, resulting in a recordkeeper becoming a fiduciary. That is obviously problematic for the recordkeepers, but is also a problem for advisors and particularly for advisors who are not experienced in working with retirement plans.

Fortunately, though, there is at least a partial solution.

The fiduciary rules include an exception for fiduciary advice to “independent fiduciaries with financial expertise.” Simply stated, an independent fiduciary with financial expertise (or IFFE) is a broker-dealer, RIA, bank or trust company, or insurance company that is willing to serve as a fiduciary and who will, in that capacity, oversee the advisor who is providing fiduciary advice to a plan. This is sometimes refer to as the “wholesaler’s exception,” and it covers recommendations made by both recordkeepers’ wholesalers, and home office personnel.

Note that there is also an IFFE exception for advice to primary plan fiduciaries (e.g., plan committees) who oversee at least $50,000,000 in assets. However, that is a subject of another article.

The wholesaler’s exception permits recordkeepers to provide investment line-ups to fiduciary advisors, but not to plan sponsors. However, in a set of FAQs, the DOL noted that wholesaler recommendations could be made in the presence of a plan sponsor, so long as the fiduciary advisor was also at the meeting. So, the recordkeeper (and the wholesaler) can avoid fiduciary status by, for example, initially meeting with the advisor to discuss the investment line-up, and then making a presentation to the plan sponsor in the presence of the advisor (or, alternatively, having the advisor make the presentation, but with the wholesaler being able to provide comments and answer questions). It’s important to know, though, that it must be clear that the recommendations are being vetted by the fiduciary advisor so that, in a sense, the recommendations are technically fiduciary advice by the advisor and not by the recordkeeper/wholesaler. As a result, advisors should make sure that they approve of the recommendations either before they are presented or at the meeting.

In my experience, broker-dealers, RIAs, and banks and trust companies will ordinarily serve as fiduciaries for the advice given by their representatives and employees. As a result, recordkeepers and wholesalers will be able to provide investment advice to these representatives without becoming fiduciaries. However, insurance companies are generally not willing to serve as co-fiduciaries with their insurance agents, and that is particularly true of independent insurance agents and brokers. However, if the insurance agents are also registered representatives of a broker-dealer, that does not present a problem, since the broker-dealer can, from a fiduciary perspective, oversee advice about insurance products; as a result, the agents will have a financial institution to qualify as the IFFE.

As described above, where an insurance agent is only licensed to sell insurance, there will not usually be a financial institution that will serve as the IFFE. That presents a significant problem for the distribution of insurance products to plans, participants, and IRAs through independent insurance agents and brokers. While group annuity contracts can be recommended under Prohibited Transaction Exemption 84-24, and the agent or broker can receive a commission, a wholesaler cannot provide the independent agent or broker with a recommended line-up — without the wholesaler and the recordkeeper becoming fiduciaries.

If properly done, a possible solution would be for the independent insurance agent or broker to not make any recommendations about investments, but instead for the plan sponsor to utilize the services of a fiduciary on the platform, for example, a 3(21) or 3(38) platform fiduciary.

The IFFE exception will likely be embraced by the recordkeeper community. As a result, the common approach will be to provide investment line-ups to fiduciary advisors who are supervised by IFFEs. That does present an issue, though, for recordkeepers who sell directly to plan sponsors without the use of an advisor. My next article will discuss the RFP/RFI approach that can be used for that purpose.

POSTSCRIPT: This article does not discuss some of the requirements for satisfying the IFFE exception to the fiduciary definition. If an advisor or a firm intends to use that exception, it should only do so with legal guidance.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.




Interesting Angles on the DOL’s Fiduciary Rule #71

Recordkeepers and Financial Wellness Programs

This is my 71st article about interesting observations concerning the Department of Labor’s fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions and related developments in the securities laws.

In my last post, Angles #70, I highlighted the three types of work that we are doing for recordkeepers as a result of the DOL’s fiduciary regulation and exemptions. This post goes into more detail about the development of financial wellness programs and the acceptance by recordkeepers of fiduciary responsibility for some of the services.

As background, the goal of financial wellness programs is to provide help to participants in achieving their short-, intermediate-, and long-term financial objectives. Recordkeepers are uniquely suited to provide those services, because of the information they already possess and because of their call centers. The services most often provided cover advice about:

  • Contributions and benefit adequacy.
  • Repayment of indebtedness.
  • Budgeting and management of expenses.
  • Savings for unexpected expenses.
  • Investing their 401(k) accounts.
  • Roll-ins to the 401(k) plan.
  • Rollovers from the 401(k) plan.

Some of that advice is fiduciary and some is not. Let’s take a closer look at that.

Clearly, recommendations about repayment of indebtedness, budgeting and management of expenses, and the accumulation of savings for unexpected expenses is not fiduciary advice. However, the recommendations must be reasonable in light of the circumstances (under the laws of most states). In addition, advice about the level of deferrals to 401(k) plans is not fiduciary advice, so long as it is based on an objective standard. For example, financial wellness programs may recommend that, as a first step, participants defer at least enough to benefit from the full match offered by the employer. In addition, those programs typically recommend at some point in the process that participants defer enough to achieve benefit adequacy at retirement (for example, a 70% income replacement ratio).

On the other hand, investment advice for participants’ accounts and recommendations of roll-ins and rollovers, is fiduciary advice. Those types of recommendations will cause the recordkeeper to become a fiduciary for those purposes. As a result, recordkeepers will need to have prudent processes in place to develop and deliver the recommendations. In addition, where the recordkeeper, or an affiliate, would make more money if a participant agrees to the recommendation, the recordkeeper will need to comply with a prohibited transaction exemption. Usually, that will the Best Interest Contract Exemption, or BICE.

For example, if a recordkeeper recommends that a participant rolls in his or her money from another plan or an IRA, the recordkeeper will need to do a prudent analysis of the relevant facts and then make a prudent and loyal recommendation to the participant. While the DOL has not provided detailed guidance about roll-ins, a reasonable approach would be for the recordkeeper to gather information about the investments, services and expenses in the IRA or old plan; the same type of information about investments, services and expenses in the recordkeeper’s plan; and information about the needs, circumstances and preferences of the participant. (As a general rule, in order to provide prudent advice, a fiduciary must gather the information that a knowledgeable person would consider relevant to making the decision. However, we are left to speculate about the specific information that would be required for a roll-in recommendation.)

In any event, recordkeepers must gather the relevant information and make prudent and loyal recommendations where they provide fiduciary advice under a wellness program. In addition, where a recordkeeper would receive additional compensation if the recommendation is accepted by the participant, the recordkeeper would need to satisfy the conditions of BICE which, in addition to the best interest standard of care, would include a prohibition on compensation in excess of a reasonable amount and would prohibit any materially misleading statements. The recordkeeper should also have written policies and procedures, together with supervision, for the development and delivery of the fiduciary recommendations.

If those conditions are satisfied, recordkeepers could provide so-called “conflicted” advice. (In this context, “conflicted” means that advice that will cause the recordkeeper or an affiliate to receive additional compensation.)

Where the financial wellness program also includes discretionary investment management of participant accounts, the issues are more complex. That is because BICE does not provide an exemption for discretionary investment management. In that case, the recordkeeper will need to either utilize an independent third party investment manager for the discretionary services or will need to use another exception (for example, the Frost Advisory Opinion or Prohibited Transaction Exemption 77-4).

Having worked on programs that offer these services to participants—and, therefore, having given it some thought, I believe that these programs will provide valuable services to employees. The financial world is increasingly complex and young employees are often burdened by substantial student loans. As a result, there is a need for help with financial decisions.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.


Interesting Angles on the DOL’s Fiduciary Rule #70

The Fiduciary Rule and Recordkeeper Services

This is my 70th article about interesting observations concerning the Department of Labor’s (DOL) fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions and related developments in the securities laws.

Almost all of my Angles articles have been about the impact of the fiduciary rule on advisors—representatives of broker-dealers and RIAs. However, the fiduciary rule also affects recordkeepers and the services that they offer to plans and advisors. In that regard, most of the work that we are doing for recordkeepers falls into three categories:

  • Acceptance of fiduciary responsibility by recordkeepers for “financial wellness” of participants.
  • Providing investment services and support for advisors, without becoming a fiduciary.
  • Providing investment services and support for plan sponsors, without becoming a fiduciary.

The next few Angles articles will discuss these issues in detail. This article is just to introduce the topics.

Financial Wellness

Financial wellness combines a focus on benefit adequacy with basic budgeting and financial management. Typically, it covers advice on plan participation, amounts to defer, repayment of indebtedness, budgeting and management of regular expenses, basic savings, investment advice and management of participants’ accounts, roll-ins to plans, and rollovers from plans. The objective is to help employees with financial decision-making for the short, intermediate and long terms. Where the recommendations constitute fiduciary advice under ERISA and the Best Interest Contract Exemption, the recordkeepers are accepting fiduciary status.

Investment Assistance to Advisors

The fiduciary rule includes an exception for investment services provided to “independent fiduciaries with financial expertise,” or “IFFEs.” Those fiduciaries include broker-dealers, RIAs, banks and trust companies, and insurance companies. In turn, where those financial institutions are willing to serve as fiduciaries with their advisors, recordkeepers can provide investment recommendations to the advisors without becoming fiduciaries. That is because the financial institution and the advisors are considered to be independent and knowledgeable fiduciaries who can evaluate the recordkeeper recommendations on behalf of their plan, participant and IRA clients.

Investment Assistance to Plan Sponsors

While recordkeepers have great flexibility to provide investment advice to advisors (who qualify as IFFEs) without becoming fiduciaries, the same is not true for advice to plan sponsors. (The IFFE provision also applies to some larger plans.)

However, there are some exceptions of general application for providing investment information to plan sponsors. The most useable exception is for responding to requests for proposals (RFPs) and requests for information (RFIs). But, even that exception is limited. The investment list provided by the recordkeeper can only be based on the size of the employer or the size of the plan, or both. For existing plans, it could be based on the current investment line-up.

A Prediction About Future Directions

As a prediction, recordkeepers will increasingly take advantage of the IFFE carve-out. That means that they will be providing suggested investment line-ups to qualifying IFFE advisors. The advisor will then need to evaluate the line-up and decide whether to present it to the plan sponsor. If an advisor then gives that investment line-up to the plan sponsor, the law will treat it as the advisor’s fiduciary recommendation (and, therefore, not as a recommendation by the recordkeeper).

That is the only meaningful exception for individualized non-fiduciary investment recommendations by recordkeepers. The RFP/RFI exception will also help, but it provides, by definition, a generic list of investments.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.


Interesting Angles on the DOL’s Fiduciary Rule #62

Is It Possible To Be An Advisor Without Being A Fiduciary?

This is my 62nd article about interesting observations concerning the Department of Labor’s fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions and related developments in the securities laws.

Under the new fiduciary definition (that applied on June 9), an investment “suggestion” is fiduciary advice. That includes suggestions about a range of issues, including investments, insurance products, investment strategies, other investment advisors and managers, IRA transfers, and plan distributions.

Because of the breadth of the definition, it is almost impossible to be an advisor to a plan without becoming a fiduciary. Under the old rules advisors would provide investment information that, at least arguably, was not fiduciary investment advice. However, under the new definition, where an advisor provides information about investments, it’s possible, perhaps even probable, that the advisor would reasonably be viewed as having suggested that the plan sponsor, participant or IRA owner choose the investments. Otherwise, why provide information about those specific investments . . . unless it was a suggestion that the retirement investor select one or more of them?

Let’s delve into that a little more deeply . . . in the context of a 401(k) plan. It is possible that for a new plan or for a plan changing recordkeepers, the recordkeeper would provide a list of investments in response to an RFI or RFP. If properly done, the list will not be fiduciary advice—because of a fiduciary exception for recordkeepers. In turn, if the advisor does not comment on the list, either favorably or unfavorably, the advisor would not be viewed as having provided fiduciary advice.

Then, at future meetings with the plan sponsor, the advisor or the recordkeeper could simply provide information about the existing investments. However, is it feasible that an advisor would not make comments about poorly performing investments which could be viewed as “suggestions” that they be removed? If those suggestions are made by an advisor, it could be fiduciary advice. Similarly, if an investment is removed, a plan sponsor needs to select a replacement investment. Who will provide the potential replacement investments to the plan sponsor? If the advisor does, that could be a suggestion, or fiduciary advice, that one of those replacement investments be used.

Alternatively, some broker-dealers may decide that their advisors can only use recordkeepers that include fiduciary advisers on their platforms. Those platform advisers would then recommend or select a plan’s investment line-up (and, in the future, would remove and replace investments, as appropriate). That might work. However, the recommendation of a third party fiduciary investment adviser or manager is also a fiduciary act. So, while the advisor would not be a fiduciary for the recommendation of investments, the advisor could be a fiduciary for “suggesting” that the plan sponsor use a fiduciary on the recordkeeper platform.

Unfortunately, these issues have not been tested in the courts or in FINRA arbitrations . . . so, it’s almost impossible to tell where the line will be drawn. As a result, broker-dealers and RIAs need to decide whether they will take the position that they are not fiduciaries—and be subject to risk, or whether they will take a conservative position and clearly be compliant.

While these rules apply to both ERISA retirement plans and IRAs, the issue is particularly acute for plans. That is because a service provider to plans must state, in its 408(b)(2) disclosures, whether it is serving as an ERISA fiduciary. If it is not, then it can remain silent on the issue. However, if the firm and its advisors will be acting as ERISA fiduciaries, that must be affirmatively stated in the 408(b)(2) disclosures. (Note that, during the transition period, recent DOL guidance permits the firm to describe its fiduciary services in the 408(b)(2) disclosures, but does not require that the firm specifically state that it is an ERISA fiduciary . . . with one exception. If a firm has previously said in its 408(b)(2) disclosures, that it was not acting as a fiduciary, that must be corrected by affirmatively saying that it is now acting as a fiduciary.)

The new rules have a number of unforeseen applications. With the likely delay of the applicability dates of the exemptions, including of the full and final Best Interest Contract Exemption, this is a good time to think about how these rules apply and what changes need to be made.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.


What’s Hot . . . in the First Quarter of 2015?

Over the last few months, the most common questions asked by clients . . . and most of my work . . . have been about three issues:

  • The DOL’s new fiduciary proposal . . . not surprising.
  • Capturing rollovers from retirement plans. Again, not surprising because of the large amount of money coming out of plans and in light of the attention being given to rollovers by the SEC, FINRA, DOL and GAO.
  • The use and allocation of revenue sharing in 401(k) plans.

I will be writing about the first two points in the future, so let’s focus on the third one now.

For about 20 years, mutual funds have paid revenue sharing to 401(k) recordkeepers for services provided to the mutual funds. That includes 12b-1 shareholder servicing fees, 12b-1 distribution fees, and subtransfer agency fees. The view was that the money was paid for services to the mutual funds . . . and only incidentally involved the plans. However, that is changing—at least partially because the 408(b)(2) regulation treated those payments as compensation to the recordkeeper for services to the plans. Because of that change, there is a growing perception that the revenue sharing payments belong to the plan, and not to the provider.

Regardless of those perceptions, the DOL’s position, and the 408(b)(2) regulation, treat the payments as compensation to recordkeepers for their services related to the plans and their investments. As a result, if the total compensation from revenue sharing exceeds the reasonable cost of recordkeeping services, the plan sponsor has a fiduciary obligation to be aware of that and to recoup the excess compensation for the benefit of the participants.

The “new news” is that some providers and some plan sponsors are allocating all of the revenue sharing back to the participants and then charging participants’ accounts for the recordkeeping costs. Why? The general answer is because it is seen as being fair. The more detailed answer is that fiduciaries have a duty to oversee the use of revenue sharing by the recordkeeper and, when they delve into the matter (in order to understand the issues and fulfill their fiduciary responsibilities), the fiduciaries often determine that the equitable allocation of revenue sharing, and then proper allocation of plan costs, produces a result that is fair and that manages the fiduciary risk.

That raises the obvious question . . . what fiduciary risk am I talking about? The risk is that there is no guidance from the DOL on the proper use and allocation of revenue sharing. In other words, plan sponsors, advisers and ERISA attorneys are operating in a vacuum. We are making educated guesses about what will ultimately happen in terms of DOL guidance or ERISA litigation. When “walking on thin ice,” it is often preferable to take a relatively conservative position. In this case, the conservative position is to allocate the revenue sharing back to the participants.

To give you an example, think about a large plan where 50% of the participants’ money is in revenue sharing mutual funds, 40% of the participants’ money is in non-revenue sharing mutual funds, and 10% is in a company stock fund (that does not pay any revenue for recordkeeping). In this case, the 50% of the participants in the revenue sharing mutual funds are carrying the cost of the whole plan. Expressed slightly differently, half of the participants are in the plan for free, because the other half are paying the cost of recordkeeping. If we assume that the half of the participants in the revenue sharing mutual funds are paying higher expense ratios, then the problem becomes obvious. Not only are those participants paying for the plan, but they are bearing a financial burden to do that.

A similar case could occur where some of the participants (probably high-compensated ones) are in stock brokerage accounts, while the rank-and-file employees are in mutual funds that pay revenue sharing. The brokerage accounts aren’t paying anything to support the plan, while the rank-and-file employees are bearing the full cost of the plan.

The fundamental question is, how should your plan sponsor clients be positioning themselves in light of the lack of DOL guidance and the potential risk?