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Jun 2021
June 10, 2021

Retirement Plan Fiduciaries and the DOL Investment Advice Rules

Employer-sponsored retirement plans are often a significant source of a retiree’s retirement income. Decisions related to investing retirement plan assets, whether made by employer-plan fiduciaries or individuals (“Retirement Investors”) are a critical factor in creating the wealth needed to support retirement. In light of the complexity of investing and the plethora of options available, Retirement Investors often turn to investment professionals for help. When those professionals are “fiduciaries” under ERISA, the law prohibits them from engaging in transactions where they may have a conflict of interest.
In the past, some professionals avoided these prohibited transaction rules by arguing they were not “fiduciaries.” This allowed them to suggest investments that would compensate them in ways that were not always in the best interest of the Retirement Investor and would not be permitted under the strict rules prohibiting conflicts of interest. For example, when suggesting an employer-plan fiduciary offer a 401(k) investment option, they could recommend an option that provided greater revenue or commissions to the professional. Or a 401(k) provider could advise a retirement plan participant to rollover an available distribution to the provider’s IRA, which would increase fees to the provider and reduce leakage from the provider to other IRAs.
The Department of Labor’s (DOL) latest attempt to address these concerns is Prohibited Transaction Exemption 2020‑02 (PTE). The PTE took aim at: (1) including more professionals in the definition of an “Investment Advice Fiduciary;” and (2) preventing Investment Advice Fiduciaries from taking advantage of Retirement Investors to benefit themselves, while still allowing common forms of compensation, subject to some guardrails. Recently the DOL elaborated on the PTE in a set of online Q&As and an online pamphlet entitled Choosing the Right Person to Give you Investment Advice: Information for Investors in Retirement Plans and Individual Retirement Accounts.

This guidance offers important takeaways for employer-plan fiduciaries (“you”) with respect to hiring and monitoring: (1) those who advise you about the investment funds that should be included in the plan; and (2) those who provide advice to participants about their investment fund selection in the plan or on rollovers (e.g., at provider call centers). The questions you should address in hiring or monitoring these professionals are:

  • Is the person or entity being hired or retained an Investment Advice Fiduciary and do they acknowledge fiduciary status?

  • If not, do you understand, and document your understanding, of why the professional is not a fiduciary, the limits of the advice, the compensation being received by the advisor, and potential conflicts of interest?

  • If fiduciary status is acknowledged, does the Investment Advice Fiduciary receive only direct compensation from the plan (or the employer) with no potential conflict of interest?

  • If potential conflicts exist, does the Investment Advice Fiduciary comply with the PTE? If not, does another prohibited transaction exemption (“Exemption”) apply? 

Is the Advisor an Investment Advice Fiduciary?
The DOL guidance now includes as “Investment Advice Fiduciaries” many professional investment advisors who previously took the position that they were not fiduciaries. Whether investment consultation is fiduciary advice depends on the totality of the circumstances. But if you or your participants are using someone to help make individualized investment decisions, it is likely they are an Investment Advice Fiduciary.
Although an advisor will be an Investment Advice Fiduciary only if paid for that advice, payment may come from third parties through commissions on sales, bonuses, increased investments with the advisor, revenue sharing, etc. You have an obligation to determine whether the advisor is being paid from any source. A fiduciary relationship also requires some continuity of the relationship, whether before or after the advice is given, along with an expectation that the advice will serve as a primary basis for the investment decision. Rollover advice to participants is now explicitly considered investment advice, as long as the other factors are present.
Investment professionals and financial institutions cannot divest themselves of fiduciary status by using boilerplate disclaimers in agreements. Although a disclaimer may be taken into account in determining fiduciary status, oral communications, marketing materials and actual behavior will be determinative.
What if the Advisor Receives Only Direct Compensation?
Some Investment Advice Fiduciaries are paid directly only by the plan, the employer or the participants; they receive no other compensation and their compensation does not vary based on the investment decisions you or the participants make. In that event, the conflict concerns addressed by the PTE do not arise and the PTE does not apply. The only requirement then is that the compensation be “reasonable” for the services provided, which can be documented through benchmarking and periodic RFPs.
What are the PTE Requirements for Indirect Compensation or Conflicts?
The PTE enables Investment Advice Fiduciaries to receive a wide range of indirect or conflicted compensation (e.g., commissions, 12b-1 fees, revenue sharing, etc.) as a result of the advice without violating the applicable prohibited transaction rules. The Investment Advice Fiduciary must then comply with:
“Impartial Conduct Standards,” which require them to:

  • Act with undivided loyalty by never placing their own interests ahead of the interests of the Retirement Investor.

  • Charge no more than reasonable compensation.

  • Avoid making misleading statements.

  • Investigate and evaluate investments.

  • Exercise the sound judgment of an impartial professional.

  • Address and mitigate firm-wide conflicts, such as the offering of proprietary funds or funds of affiliates. 

Disclosure Rules, which require:

  • Acknowledgement of fiduciary status in writing.

  • A description of the services they will be providing.

  • Disclosure of any material conflicts of interest. 

Special Rollover Disclosure Rules, which require:

  • Written, specific reasons why the rollover is in a participant’s best interest.

  • Addressing alternatives to a rollover, including the fees and expenses associated with staying in the plan vs. the rollover, whether the employer pays for any of these fees and the different levels of service and investments available under the plan. 

Mitigation Requirements, which require financial institutions to:

  • Establish, maintain and enforce policies and procedures that mitigate the investment professional’s and financial institution’s conflicts of interest such that investment professionals place their interests equal to or subordinate to those of a Retirement Investor (effectively eliminating the ability of financial institutions to set sales quotas or similar performance standards for, or provide sales bonuses and prizes to, their investment professionals).

  • Give the Retirement Investor a written description of any material conflicts of interest arising out of the services before engaging in a transaction, the content of which is sufficient to allow a reasonable person to assess the scope and severity of the financial institution’s and investment professional’s conflicts of interest. The DOL cautioned that the disclosure should be more than simply having the Retirement Investor “check the box” to confirm that they know of the conflicts. 

Other prohibited transaction exemptions may also be available that address potential conflicts. For example, ERISA Section 408(g) allows computer-modeled advice to be provided as long as certain requirements are met. For any possibly conflicted Investment Advice Fiduciary, you should ask the Investment Advice Fiduciary what exemption they are using and request documentation of compliance with that exemption.
Hiring and Monitoring an Advisor
In the Choosing the Right Person pamphlet, the DOL has provided questions Retirement Investors can ask when interviewing or monitoring potential advice providers; and background information to help them understand the purpose of each question. Anyone hiring an investment advisor should review these questions at the time of hire and again when subsequently monitoring the advisor. Although some of the questions are more appropriate for individual investors, the questions generally are useful to inform and protect any Retirement Investor.
Effective Date
The PTE became effective on February 16, 2021, although the DOL will not enforce it with respect to advice previously provided in line with earlier interpretations (the 2018 DOL Field Advice Bulletin will remain in place until December 20, 2021). The DOL also anticipates taking further regulatory action regarding Investment Advice Fiduciaries, including possibly revoking prior Exemptions. So, stay tuned ─ the DOL is not done yet with addressing conflicted investment advice.
If you have any questions concerning retirement plan fiduciaries and the DOL’s investment advice rules, please contact Mary Jo Larson, Brianna Richardson or another member of  Warner’s Employee Benefits/Executive Compensation Practice Group.

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