The Department of Labor (“DOL”) previously issued fiduciary regulations many years ago, back in 1975. Given the proliferation of participant-directed investments and IRAs as well as the increased complexity of financial instruments, the DOL believes that these old rules are no longer adequate to protect retirement benefit (both ERISA and IRA) investors. The DOL’s primary concern is that providers of retirement investment alternatives may have significant conflicts of interest causing them to make investment recommendations that are not in the best interests of the investor.
A person renders investment advice if s/he has a relationship described in 4, below, and provides a plan, plan fiduciary, plan participant, IRA, or IRA owner the following types of advice in exchange (directly or indirectly) for a fee or other compensation:
The determination of whether a communication is a “recommendation” is subjective rather than objective. The regulations describe a “recommendation” as a communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the recipient engage in or refrain from taking a particular course of action. The more tailored the communication is, the more likely it is to be considered a recommendation.
The new rule covers the following types of relationships:
In connection with the new fiduciary rules the DOL issued a prohibited transaction exemption, allowing for certain actions by financial services providers that would otherwise be prohibited as “self-dealing” to be exempt from the prohibited transaction rules of ERISA and the Internal Revenue Code. In order to qualify for the exemption, financial service providers will need to take a number of steps to ensure that they are acting in the best interests of investors. The steps include establishing procedures to both disclose and avoid potential conflicts of interest.
No, the DOL says that it will address appraisals in a separate rulemaking project.
The rules will generally take effect in April, 2017, but full compliance with the BICE requirements will be delayed until January 1, 2018. Until January 1, 2018, the DOL says that it will focus on assisting with compliance with the rules rather than enforcement. Until April, 2017, the current fiduciary rules apply. These rules generally do not provide as much protection to investors as the new rules. Plan sponsors might want to keep this in mind during the next year, particularly with respect to advice given to terminating participants by investment service providers regarding rollovers to IRAs.
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