On April 6, 2016, the Department of Labor (DOL) announced the final fiduciary rule which has meaningful implications for the definition of a fiduciary as it applies to investment advice. The final rule, which is the result of a nearly six-year process, describes the circumstances under which a person providing investment advice would be considered a fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA). In general, a party with fiduciary responsibility for investment advice is prohibited from receiving compensation for that advice, unless an exemption applies. If there is not an exemption that applies, then the arrangement is considered a prohibited transaction and may result in excise taxes. The new rule clarifies when fiduciary status will be applied to those who are providing investment advice. The following are included as exceptions in the final rule that, if applicable, would not result in such advice being considered fiduciary investment advice:
- Education – Assuming certain criteria are met, a service provider would not be considered a fiduciary simply by providing educational materials. For a plan that is subject to ERISA, that education may include asset allocation models and identify specific investment alternatives under the plan when certain conditions are met.
- General Communications – Generic communication by itself will not lead to fiduciary status. Examples of communication exempt from the rule include public presentations, marketing materials, and newsletters. The more specific and tailored the advice is, the less likely it is that this exemption will apply.
- Platform Providers - Under the rule, service providers who offer a platform of investment options to plan fiduciaries who then select the options they will make available to plan participants may not be subject to fiduciary status. For this exception to apply, the provider must state in writing that they are not providing impartial advice or providing advice in a fiduciary capacity.
- Acknowledge fiduciary status
- Offer advice based on the best interest of the recipient
- Receive compensation that is considered reasonable
- Have policies in place to address conflicts of interest
- Disclose conflicts and the cost of the advice
This expansive rule will have implications for investors and advisors. In order to give interested parties time to understand and conform, the rule will not be effective until April 10, 2017 (with certain provisions not fully effective until January 1, 2018). If you have questions about the rule and how it might impact you, please contact your Nyhart consultant.