Interesting Angles on the DOL’s Fiduciary Rule #13
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 status. The DOL defines a fiduciary recommendation as:
For purposes of this section, ‘‘recommendation’’ means a communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action.
So, what does this mean? First, if you don’t want to be a fiduciary for that purpose, the safest bet is to avoid suggestions of investment policies or providing a sample IPS. A reasonable question is . . . if you didn’t mean for your comments or the sample document to suggest the use of the policies or IPS, why did you bring it up?
On the other hand, if you are willing to be a fiduciary for this purpose, make sure that you are a fiduciary (that is, that the recommendations/IPS are prudent under the circumstances). Keep in mind that ERISA’s prudent process rule is based on generally accepted investment theories and prevailing investment industry standards. Your policy recommendations should be based on those concepts (absent an explicit instruction from the investor to the contrary).
If you have read to this point, you are probably thinking about these issues in the context of retirement plans. That’s valid, but only partially so. Beginning April 10, these rules also apply to IRAs. Do you suggest investment policies to IRA owners or supply an IPS? If so, the same concepts will apply.
Forewarned is forearmed.
EMPLOYEE BENEFITS AND EXECUTIVE COMPENSATION ATTORNEY
8yThat much is clear in the 1975 regulation. B-Ds became nuanced themselves in skirting the technical definition of "advice" for the sole purpose of avoiding fiduciary status, yet the recipient is just as much impacted in the short term or long term by the types of recommendations you apparently think don't rise to the level of affecting "management" of plan assets.
EMPLOYEE BENEFITS AND EXECUTIVE COMPENSATION ATTORNEY
8yHi Paul I don't think that's quite right. ERISA has always identified "investment advice" described in 3(21)(a)(ii) as an independent source of fiduciary status distinguishable from the exercise of discretionary authority or control over the "management" of plan assets described in (a)(I) or "administration" of the plan described in (a)(iii).
Sales / Business Development
8yHi Fred, This is all becoming very nuanced -- which often spells trouble. Historically one had to exert some level of control over the management of the Plan, or the Plan assets, to maintain a fiduciary status. You quote from the preamble:: 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. The language in the preamble goes from management of assets (which is an understandable trigger for fiduciary status), to "recommendations on investment policies or strategies". That's a big leap in a single paragraph - going from an environment where there are assets being managed (under control), to a "recommendation", where there is no obvious control -- and for all we know, no assets in play. Doesn't it make sense that at a minimum, the flow of assets need to be affected, prior to anointing fiduciary status?
Former CEO | Speak. Teach. Help. Advise.
8yHi Fred, thank you for these posts. They are very helpful. Might there be a post specifically on the impact on plan sponsors of the new DOL rule?