This is my nineteenth article about interesting observations about the fiduciary regulation and the exemptions.
In an earlier post (Angles #16), I described how advisers could use the “hire me” approach to explain their services and fees without becoming a fiduciary for that purpose. Generally stated, under that approach, an adviser could explain his services and fees, but could not discuss specific products or platforms. In other words, if the adviser “suggested” specific products or platforms, the adviser would become a fiduciary even under “hire me.” The DOL explained that result in the preamble to the fiduciary regulation:
“An adviser can recommend that a retirement investor enter into an advisory relationship with the adviser without acting as a fiduciary. But when the adviser recommends, for example, that the investor pull money out of a plan or invest in a particular … Read More »
This is my thirteenth article about interesting observations “hidden” in the fiduciary regulation and the exemptions.
It is not clear under current rules whether “suggesting” investment policies is a fiduciary act. In that vein, it’s also not clear if providing a sample investment policy statement (IPS) is a fiduciary act. However, that is about to change.
When the new fiduciary regulation applies—on April 10, 2017, the recommendation of investment policies, strategies or portfolio composition will be fiduciary activities. As the DOL says in the preamble to the fiduciary regulation:
Specifically, the final rule includes text that describes management of securities or other investment property, as including, among other things, recommendations on investment policies or strategies, portfolio composition, or recommendations on distributions, including rollovers, from a plan or IRA.
And, a mere suggestion to use certain investment policies can result in fiduciary … Read More »
This is my eleventh article about interesting observations “hidden” in the fiduciary regulation and the exemptions.
ERISA and the Internal Revenue Code limit compensation for services to plans and IRAs to “reasonable” amounts. Prohibited Transaction Exemption (PTE) 84-24 and the Best Interest Contact Exemption (BICE) also limit compensation to reasonable amounts.
While the concept of reasonable compensation is old-hat for advisers and service providers to ERISA qualified retirement plans, it has not, by and large, been used in the IRA world. As a result, some people are asking . . . what is reasonable compensation? The DOL explained the concept in a preamble:
“The obligation to pay no more than reasonable compensation to service providers is long recognized under ERISA and the Code. ERISA section 408(b)(2) and Code section 4975(d)(2) require that services arrangements involving plans and IRAs result in no … Read More »
This is my tenth article about interesting observations “hidden” in the fiduciary regulation and the exemptions.
When the new fiduciary advice regulation is applicable on April 10, 2017, a recommendation to a participant to take a distribution and rollover to an IRA will be a fiduciary act. It doesn’t matter if the adviser has a pre-existing relationship with the plan or the participant, or not.
Some RIA firms and broker-dealers focused on a similar issue when FINRA issued its Regulatory Notice 13-45 in late 2013. As that notice explained, distribution recommendations are investment recommendations (and thus, in the case of FINRA, are subject to the suitability standard), but distribution education is not an investment recommendation. To avoid the additional compliance work (and possibly prohibited transactions), many RIA firms and broker-dealers adopted a distributions education approach using 13-45 as the model. While the … Read More »
This is my eighth article about interesting observations “hidden” in the fiduciary regulation and the exemptions.
The final regulation on fiduciary advice continues, as education, the current practice of providing participants with asset allocation models that are populated with a plan’s designated investment alternatives (DIAs).
However, the rule imposes a burden on plan sponsors to monitor those models and which DIAs are used for the models. The fiduciary focus should be on the costs and payments from investments to providers and advisers. The preamble says:
“In this connection, it is important to emphasize that a responsible plan fiduciary would also have, as part of the ERISA obligation to monitor plan service providers, an obligation to evaluate and periodically monitor the asset allocation model and interactive materials being made available to the plan participants and beneficiaries as part of any education program.
Read More »
This is my sixth article about interesting observations “hidden” in the preambles to the fiduciary regulation and the exemptions.
In some cases, the concerns about the scope of the fiduciary rule are overblown. For example, there have been some statements that advice about minimum required distributions for IRAs would be fiduciary advice. That is not the case.
In the preamble to the fiduciary regulation, the DOL explained:
“With respect to the tax code provisions regarding required minimum distributions, the Department agrees with commenters that merely advising a participant or IRA owner that certain distributions are required by tax law would not constitute investment advice. Whether such “tax” advice is accompanied by a recommendation that constitutes “investment advice” would depend on the particular facts and circumstances involved.”
So, basic advice about tax requirements and consequences is not fiduciary advice. However, if the adviser recommends which … Read More »
The DOL’s fiduciary rule has been published in the Federal Register. Based on our review of the regulation and conversations with our clients, here are some overview thoughts about the regulation and the two “distribution” exemptions (84-24 and BICE).
The Fiduciary Definition
The rule is much as expected. The definition of fiduciary advice continues to be very broad, capturing almost all common sales practices for investments and insurance products. It includes investment recommendations to plans, participants and IRA owners, as well as recommendations about distributions from plans and transfers and withdrawals of IRAs. All of those will be fiduciary activities.
As a result, those recommendations will be subject to the fiduciary standard when made to plans or participants, and subject to the Best Interest standard of care when made to IRA owners (if the adviser needs the prohibited transaction relief provided in … Read More »
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The allocation of revenue sharing in 401(k) plans is a fiduciary decision. We explored that issue in detail in a recent white paper. We also looked at the concept of lowest “net” expense ratios. We concluded that there were fiduciary risk management benefits to “equalizing” revenue sharing (that is, returning it to the participants whose investments generated it) and for using the lowest net expense ratio for investments (i.e., the lowest net expense ratio after offsetting revenue sharing). A copy of that white paper is here.
Little has been written about how a plan fiduciary should prudently select insurance companies and guaranteed retirement income for participants. There’s a DOL “safe harbor” regulation, but it doesn’t give fiduciaries a checklist for compliance. To address this, Lincoln Financial hired us to work with an insurance consultant to develop a set of criteria that fiduciaries or their advisors can use to make those decisions. Bruce Ashton and I have written an article about the checklist that can be found here: Did you know…About the Fiduciary Requirements for Selecting a Lifetime Income Provider? The article has links to the white paper and the checklist.