Key Points

• New proposal would allow investment advisors to provide advice to ERISA retirement plan participants for a fee, despite potential conflicts of interest.
• Reinstates five-part test from 1975 for determining when an investment advisor provides investment advice as a fiduciary to a plan participant.

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The U.S. Department of Labor (DOL) issued new guidance on when a financial institution or an investment professional for an ERISA retirement plan acts as a fiduciary in providing advice to plan participants. When acting as a fiduciary under ERISA, these investment advisors must act prudently and with loyalty to the participant. This DOL fiduciary rule does not apply to governmental plans, which are not subject to ERISA.

The DOL guidance officially removed the stricter fiduciary rule from 2016 that was struck down by a federal court. The DOL issued a new proposal for a broader and more flexible “prohibited transaction exemption” that would allow investment advisors to charge fees for investment advice they will profit from without violating the ERISA fiduciary standards.

The guidance reinstates a 1975 rule that established a five-part test for determining when an investment advisor acts as a fiduciary in advising retirement plan participants:

1. The advisor gives advice to the participant about the value of plan investments, or makes recommendations about buying or selling plan investments;
2. On a regular basis,
3. Under a mutual agreement or understanding between the advisor and the participant, the plan, or a plan fiduciary that,
4. The advice will be a primary basis for investment decisions, and
5. The advice will be individualized.

According to DOL guidance, taking a distribution from a retirement plan is a decision to sell plan investments that could be covered by this test. Because all five parts of the test must be met, advising a plan participant about rolling over a plan distribution to an IRA would not trigger the fiduciary rule where the rollover is an isolated transaction. However, if the rollover advice is part of an ongoing relationship between the investment advisor and the participant, the fiduciary rule could apply. The fiduciary rule also can apply when a participant buys or sells investments offered by the investment advisor.

Under the proposal, investment advisors who act as fiduciaries must comply with “impartial conduct standards” consisting of a best interest standard, a reasonable compensation standard, and a requirement to make no materially misleading statements about investment transactions and related matters. Investment advisors must adopt written policies and procedures to ensure compliance with these standards, and annually review their past compliance.

The “best interest” standard permits investment advisors to profit from investment advice they provide, so long as the advisor does not place their interest ahead of the investing participant’s interest, or subordinate the participant’s interest to their own interest. For rollover advice, the advisor must document the reasons why their recommendation is in the best interest of the participant.

Under the proposal, advisors must disclose their conflicts of interest to plan participants in writing. The DOL cautions that this disclosure requirement is not intended to create a private right of action as between an investment advisor and a plan participant.

The DOL is accepting comments on the proposal through August 6, 2020. We will monitor the proposal and provide an update when a final rule is issued. If you have questions, please reach out to your contact in the Hanson Bridgett Employee Benefits Group.