The U.S. Department of Labor has released its package of proposed changes to the regulation defining fiduciary advice and to the exemptions for conflicts and compensation for investment recommendations to retirement plans, participants (including rollovers), and IRAs.
- ERISA’s fiduciary and prohibited transaction rules require consideration of costs and compensation when fiduciary recommendations are made to “retirement investors,” that is, to private sector retirement plans, participants in those plans, and IRA owners.
- Where the Internal Revenue Code’s prohibited transaction rules are violated, the protection of an exemption will be needed. In that case, the protections of PTEs 84-24 and 2020-02 will require that costs and compensation be considered.
- The consideration is that the costs and/or compensation cannot be more than a reasonable amount.
- However, the determination of what is reasonable is largely left to industry practices—that is, what would the costs for a product or service, or the compensation of an advisor or agent, be in a transparent and competitive market.
The ERISA fiduciary responsibility rules require that plan costs, for both investments and services, be no more than a reasonable amount. In other words, a prudent process will consider the costs of investments and services relative to the value of those investments or services to the retirement investor. The ERISA prohibited transaction rules impose a similar limit on compensation where there is a fiduciary recommendation that results in a conflict of interest, that is, the compensation cannot be more than a reasonable amount when compared to the value of services being offered (and, in most cases, that would be the compensation paid for those services in a transparent and competitive marketplace). These rules apply to all ERISA-governed retirement plans and participant accounts in those plans.