The DOL Conflict of Interest Rule – What Does It Mean for Plan Sponsors?
The Department of Labor published its final Conflict of Interest Rule on April 8, 2016. In general, it will become applicable on April 10, 2017, although certain portions of the rule will not become applicable until January 1, 2018.
Why Was It Needed?
A rule was initially promulgated in 1975, at a time when retirement plans were primarily defined benefit plans, and participant investment control was not a significant consideration. Since then, then landscape has increasingly shifted to defined contribution plans with 401(k) features and IRAs. On a much more frequent basis, financial products are being marketed directly to retail investors, plan participants, and IRA owners, many of which do not have the personal investment expertise and must rely on outside advice, often without the tools to assess the quality of that advice or to identify possible conflicts of interest on the part of the advisor. In addition, the products themselves have become much more complex.
Who is a Fiduciary?
A fiduciary is an individual to the extent that he or she does any of the following, provided there is associated direct or indirect compensation:
- Represents that he or she is acting as a ERISA fiduciary with respect to rendering investment advice
- Renders investment advice pursuant to a written or verbal agreement or arrangement, where the advice is based on the particular needs of the advice recipient
- Provides investment advice to a specific recipient regarding the advisability of a particular investment or investment decision
What are the Consequences of Being a Fiduciary?
Such an individual is subject to heightened “expert” standards of care and impartiality, and must act in the best interest of plan participants.
In providing advice that may result in compensation, certain disclosures must be furnished to the recipient.
What Actions are Required on the Part of a Plan Sponsor?
Some relationships and agreements with financial advisors may need to undergo changes.
An advisor’s fiduciary status could lead to possible prohibited transactions (“PT”). Fiduciaries should re-evaluate their fiduciary status under the new rule, taking into consideration the various exceptions and exemptions, in order to avoid potentially being involved in a PT. Plan sponsors should ensure that persons providing advice to the plan or to plan participants have gone through this process.
Keep in mind that the onus of compliance lies with the fiduciary, not with the plan sponsor. Further, it is likely the exception, rather than the rule, that parties providing advice have not already identified themselves as fiduciaries.
That being said, over the coming months MJM401k will review your plan relationships to determine if any areas of noncompliance exist.