On April 6, after years of work, comments, hearings, discussions and more work, the U.S. Department of Labor released a final rule clarifying the term “fiduciary” as it relates to financial and investment advisers and spelling out when conflicts of interest arise relating to retirement plan advice. My colleague Lois Gleason gave you an excellent recap of what you—as a plan sponsor—need to know about the new rule. In the meantime, we’ve been digging into the most common questions we’ve been hearing.

1. Who is a fiduciary under the final rule?
A person who gives investment advice for a fee is considered to be a fiduciary. The final rule clarifies that if the advice is based on the particular needs of the person being advised or is directed to a specific plan sponsor, plan participant or IRA owner, the adviser is a fiduciary. The advice can relate to buying or selling investments or rolling assets from an employment-based retirement plan to another employment-based plan or an IRA. The fiduciary can be a broker, registered investment adviser or other type of adviser. Some of these advisers were already subject to federal securities laws; others were not.

2. What is best interest?
The final rule clarifies that a fiduciary must provide advice that benefits or is in the “best interest” of the plan sponsor, plan participant or IRA owner.

3. What is a conflict of interest?
In a conflict-of-interest situation, an adviser typically has some sort of incentive—primarily a financial one—to act in his or her own best interest, rather than in a client’s best interest. For example, an adviser may have a conflict of interest if he or she gets paid more for steering clients into one investment product instead of another. These payments can be hidden in fine print or not disclosed at all, and the investment product in question may or may not generate the best return for the client’s specific situation. Under the final rule, advisers—as fiduciaries—cannot give clients advice that better helps their own firms or pocketbooks.

4. Weren’t advisers fiduciaries before now?
Certainly, many advisers have always put the best interest of their clients first. And the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) have regulated certain advisers in the past. But many financial professionals—including insurance agents, commission-based stockbrokers, broker-dealers and others—were not subject to a fiduciary requirement until now.

[Related: Webcast, July 14, 2016—Update on the DOL Conflict of Interest Rule]

5. What sort of recommendations are considered “advice”?
Under the final rule, a recommendation that would reasonably be viewed as a suggestion to an individual that they should take or not take a particular course of action would be considered “advice.”  Also, the more individually tailored the communication is to a specific individual, the more likely it will be viewed as advice.

6. What is investment or retirement “education”?
The final rule describes four broad categories of non-fiduciary educational information and materials and offers examples in each category.

1. Plan information. Examples include:
   • Plan distribution options, including the advantages, disadvantages and risks of different forms of distributions
   • Plan operations
   • The advantages of plan participation and increasing plan contributions
   • The impact of preretirement withdrawals
   • Fee and expense information
   • Investment objectives and philosophies
   • Investment risk and return characteristics
   • Historical investment return information
2. General financial, investment and retirement information (note: to be “education” not “advice,” information cannot address specific investment products, specific plan or IRA investment alternatives or distribution options). Examples include:
   • General financial and investment concepts (e.g., risk and return, diversification, compounded return)
   • Historic differences in rates of return between different asset classes (e.g., equities, bonds or cash) based on standard market indices
   • Effects of fees and expenses on rates of return
   • Effects of inflation
   • Estimating future retirement income needs
   • Determining investment time horizons
   • Assessing risk tolerance
   • Retirement-related risks (e.g., longevity risks, interest rates, inflation, health care and other expenses)
   • General methods and strategies for managing assets in retirement (e.g., systematic withdrawal payments, annuitization, guaranteed minimum withdrawal benefits), including those offered outside the plan or IRA.
3. Asset allocation models
   • Information and materials (e.g., pie charts, graphs or case studies) that provide models of asset allocation portfolios of hypothetical individuals with different time horizons and risk profiles.
4. Interactive investment materials
   • Questionnaires, worksheets, software and similar materials that provide an individual the means to:
     • Estimate future retirement income needs and assess the impact of different asset allocations on retirement income
     • Evaluate distribution options, products, or vehicles; or
     • Estimate a retirement income stream that could be generated by an actual or hypothetical account balance.

7. What are “general communications”?
General communications, not individualized to one person, typically are not advice because they would not be reasonably interpreted as investment advice. Examples include prospectuses; general marketing materials; television, radio, and public media talk show commentary; remarks made in widely attended speeches and conferences; and research reports.

8. What is a Best Interest Contract Exemption?
This regulatory exemption allows advisers to continue using certain compensation arrangements that might otherwise be forbidden as long as they, among other things, commit to putting their client’s best interest first, adopt anticonflict policies and procedures (including avoiding certain incentive practices) and disclose any conflicts of interest that could affect their best judgment as a fiduciary giving advice. Common forms of compensation, such as commissions, revenue sharing and 12b-1 fees, are allowed under this exemption, as long as the conditions of the exemption are satisfied. This exemption is available to advisers who advise IRA owners, individual plan participants and small retirement plans. IRA owners switching to a new adviser after January 1, 2018 will be given a best interest contract to sign. IRA owners continuing with their existing adviser will receive notice of their new rights. ERISA plan participants (e.g., those in a 401(k) or other employer-sponsored plan) will receive the same general protections and disclosure from their advisers but will not receive a contract to sign.

9. When does the final rule go into effect?
The final rule was effective June 7, 2016 and is applicable April 10, 2017. The best interest contract provision goes into effect on January 1, 2018.

10. Is the rule a done deal?
Both houses of Congress passed resolutions to negate the rule, but President Obama vetoed them. On June 22, the House of Representatives failed to override the veto by a two-thirds majority, and it is unlikely there will be a two-thirds majority in the Senate if a similar vote is called. As of this writing, several lawsuits have been filed by industry trade groups to revoke or delay the rule.

Stay tuned to the International Foundation for updates—We’ll continue to keep you informed on the latest news about the fiduciary rule, starting with a free member webcast, July 14, 2016 which will further explore how this rule change will impact your plan, service providers and participants. 

Julie Stich, CEBS
Director, Research at the International Foundation