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.



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