This is 71st article about interesting observations concerning the Department of Labor’s fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions and related developments in the securities laws.
In my last post, Angles #70, I highlighted the three types of work that we are doing for recordkeepers as a result of the DOL’s fiduciary regulation and exemptions. This post goes into more detail about the development of financial wellness programs and the acceptance by recordkeepers of fiduciary responsibility for some of the services.
As background, the goal of financial wellness programs is to provide help to participants in achieving their short-, intermediate-, and long-term financial objectives. Recordkeepers are uniquely suited to provide those services, because of the information they already possess and because of their call centers. The services most often provided cover advice about:
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Contributions and benefit adequacy.
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Repayment of indebtedness.
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Budgeting and management of expenses.
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Savings for unexpected expenses.
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Investing their 401(k) accounts.
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Roll-ins to the 401(k) plan.
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Rollovers from the 401(k) plan.
Some of that advice is fiduciary and some is not. Let’s take a closer look at that.
Clearly, recommendations about repayment of indebtedness, budgeting and management of expenses, and the accumulation of savings for unexpected expenses is not fiduciary advice. However, the recommendations must be reasonable in light of the circumstances (under the laws of most states). In addition, advice about the level of deferrals to 401(k) plans is not fiduciary advice, so long as it is based on an objective standard. For example, financial wellness programs may recommend that, as a first step, participants defer at least enough to benefit from the full match offered by the employer. In addition, those programs typically recommend at some point in the process that participants defer enough to achieve benefit adequacy at retirement (for example, a 70% income replacement ratio).
On the other hand, investment advice for participants’ accounts and recommendations of roll-ins and rollovers, is fiduciary advice. Those types of recommendations will cause the recordkeeper to become a fiduciary for those purposes. As a result, recordkeepers will need to have prudent processes in place to develop and deliver the recommendations. In addition, where the recordkeeper, or an affiliate, would make more money if a participant agrees to the recommendation, the recordkeeper will need to comply with a prohibited transaction exemption. Usually, that will the Best Interest Contract Exemption, or BICE.
For example, if a recordkeeper recommends that a participant rolls in his or her money from another plan or an IRA, the recordkeeper will need to do a prudent analysis of the relevant facts and then make a prudent and loyal recommendation to the participant. While the DOL has not provided detailed guidance about roll-ins, a reasonable approach would be for the recordkeeper to gather information about the investments, services and expenses in the IRA or old plan; the same type of information about investments, services and expenses in the recordkeeper’s plan; and information about the needs, circumstances and preferences of the participant. (As a general rule, in order to provide prudent advice, a fiduciary must gather the information that a knowledgeable person would consider relevant to making the decision. However, we are left to speculate about the specific information that would be required for a roll-in recommendation.)
In any event, recordkeepers must gather the relevant information and make prudent and loyal recommendations where they provide fiduciary advice under a wellness program. In addition, where a recordkeeper would receive additional compensation if the recommendation is accepted by the participant, the recordkeeper would need to satisfy the conditions of BICE which, in addition to the best interest standard of care, would include a prohibition on compensation in excess of a reasonable amount and would prohibit any materially misleading statements. The recordkeeper should also have written policies and procedures, together with supervision, for the development and delivery of the fiduciary recommendations.
If those conditions are satisfied, recordkeepers could provide so-called “conflicted” advice. (In this context, “conflicted” means that advice that will cause the recordkeeper or an affiliate to receive additional compensation.)
Where the financial wellness program also includes discretionary investment management of participant accounts, the issues are more complex. That is because BICE does not provide an exemption for discretionary investment management. In that case, the recordkeeper will need to either utilize an independent third party investment manager for the discretionary services or will need to use another exception (for example, the Frost Advisory Opinion or Prohibited Transaction Exemption 77-4).
Having worked on programs that offer these services to participants—and, therefore, having given it some thought, I believe that these programs will provide valuable services to employees. The financial world is increasingly complex and young employees are often burdened by substantial student loans. As a result, there is a need for help with financial decisions.
The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.
Part 1- Interesting Angles on DOL’s Fiduciary Rule #1
Part 2 - Best Interest Standard of Care: Interesting Angles on the DOL’s Fiduciary Rule #2
Part 3 - Hidden Preamble Observations: Interesting Angles on the DOL’s Fiduciary Rule #3
Part 4 - TV Stock Tips and Fiduciary Advice: Interesting Angles on DOL’s Fiduciary #4
Part 5 - Level Fee Fiduciary Exemption: Interesting Angles on DOL’s Fiduciary Rule #5
Part 6 - Fiduciary Regulation And The Exemptions: Interesting Angles on the DOL’s Fiduciary Rule #6
Part 7 - Fiduciary Regulations And The Exemptions : Interesting Angles on the DOL’s Fiduciary Rule #7
Part 8 - Designated Investment Alternatives: Interesting Angles on the DOL’s Fiduciary Rule #8
Part 9 - Best Interest Standard and the Prudent Man Rule: Interesting Angles on the DOL’s Fiduciary Rule #9
Part 10 - FINRA Regulatory Notice: Interesting Angles on the DOL’s Fiduciary Rule #10
Part 11-ERISA and the Internal Revenue Code: Interesting Angles on the DOL’s Fiduciary Rule #11
Part 12- Potential Prohibited Transactions: Interesting Angles on the DOL’s Fiduciary Rule #12
Part 13-Investment Policies: Interesting Angles on the DOL’s Fiduciary Rule #13
Part 14- Investment Suggestions: Interesting Angles on the DOL’s Fiduciary Rule #14
Part 15- Best Interest Contract Exemption: Interesting Angles on the DOL’s Fiduciary Rule #15
Part 16 - Adviser Recommendations: Interesting Angles on DOL’s Fiduciary Rule #16
Part 17 - Level Fee Fiduciary: Interesting Angles on DOL’s Fiduciary Rule #17
Part 19- Interesting Angles on the DOL’s Fiduciary Rule #19: Advisors' Use of "Hire Me" Practices.
Part 20- Three Parts of "Best Interest Standard of Care": Interesting Angles on the DOL’s Fiduciary Rule #20
Part 22-Banks and Prohibited Transactions: Interesting Angles on the DOL’s Fiduciary Rule #22
Part 24 - Differential Compensation Based on Neutral Factors: Interesting Angles on DOL’s Fiduciary Rule #24
Part 25-Reasonable Compensation Versus Neutral Factors: Interesting Angles on the DOL’s Fiduciary Rule #25
Part 27 - Definition of Compensation: Interesting Angles on DOL’s Fiduciary Rule #27
Part 28 - What About Rollovers that Aren’t Recommended?: Interesting Angles on the DOL’s Fiduciary Rule #28
Part 29- Capturing Rollovers: What Information is Needed?: Interesting Angles on the DOL’s Fiduciary Rule #29
Part 31 - “Un-levelizing” Level Fee Fiduciaries: Interesting Angles on the DOL’s Fiduciary Rule #31
Part 33- Discretionary Management, Rollovers and BICE: Interesting Angles on the DOL’s Fiduciary Rule #33
Part 34- Seminar Can Be Fiduciary Act: Interesting Angles on DOL’s Fiduciary Rule #34
Part 35- Presidential Memorandum on Fiduciary Rule: Interesting Angles on the DOL’s Fiduciary Rule #35
Part 36 -Retirement Advice and the SEC: Interesting Angles on the DOL’s Fiduciary Rule #36
Part 37 - SEC Retirement-Targeted Examinations: Interesting Angles on the DOL’s Fiduciary Rule #37
Part 42 - Rollovers under DOL’s Final Rule: Interesting Angles on DOL’s Fiduciary Rule #42
Part 43 - BICE Transition: More Than the Eye Can See - Interesting Angles on DOL’s Fiduciary Rule #43
Part 44 - Basic Structure of Fiduciary Package (June 9): Interesting Angles on DOL’s Fiduciary Rule #44
Part 47- “Real” Requirements of Fiduciary Rule: Interesting Angles on DOL’s Fiduciary Rule #47
Part 49- The Requirement to Disclose Fiduciary Status: Interesting Angles on the DOL’s Fiduciary Rule #49
Part 50- Fourth Impartial Conduct Standard: Interesting Angles on DOL’s Fiduciary Rule #50
Part 51- Recommendations to Transfer IRAs: Interesting Angles on the DOL’s Fiduciary Rule #51
Part 54 - The DOL’s RFI and Possible changes to BICE: Interesting Angles on the DOL’s Fiduciary Rule #54
Part 55- DOL’s RFI and Recommendation of Annuities- Interesting Angles on DOL’s Fiduciary Rule #55
Part 58- Recommendations to Contribute to a Plan or IRA- Interesting Angles on the DOL’s Fiduciary Rule #58
Part 60- What the Tibble Decision Means to Advisers: Interesting Angles on the DOL’s Fiduciary Rule #60
Part 61- The Fiduciary Rule, Distributions and Rollovers: Interesting Angles on the DOL’s Fiduciary Rule #61
Part 65- Unexpected Consequences of Fiduciary Rule - Interesting Angles on the DOL’s Fiduciary Rule #65
Part 66- Concerns About 408(b)(2) Disclosures: Interesting Angles on the DOL’s Fiduciary Rule #66
Part 67- From the DOL to the SEC - Interesting Angles on the DOL’s Fiduciary Rule #67
Part 68-Recommendations of Distributions - Interesting Angles on the DOL’s Fiduciary Rule #68
Part 69- Compensation Risks for Broker-Dealers and RIAs: Interesting Angles on the DOL’s Fiduciary Rule #69
Part 70-The Fiduciary Rule and Recordkeeper Services: Interesting Angles on the DOL’s Fiduciary Rule #70
Part 72-The "Wholesaler" Exception: Interesting Angles on the DOL’s Fiduciary Rule #72
Part 74 -One More Fiduciary Issue for Recordkeepers: Interesting Angles on the DOL’s Fiduciary Rule #74
Part 75 - The Fiduciary Rule: Mistaken Beliefs-Interesting Angles on the DOL’s Fiduciary Rule #75
Part 77 - The Fiduciary Rule: Mistaken Beliefs (#2): Interesting Angles on the DOL’s Fiduciary Rule #77
Part 78 - The Fiduciary Rule: Mistaken Beliefs (#3): Interesting Angles on the DOL’s Fiduciary Rule #78
Part 79 - The Fiduciary Rule: Mistaken Beliefs (#4)- Interesting Angles on the DOL’s Fiduciary Rule #79
Part 80 - Enforceable During Transition?: Interesting Angles on the DOL’s Fiduciary Rule #80
Part 83 - Part 2 of Undisclosed (and Disclosed) 12b-1 Fees: Interesting Angles on the DOL’s Fiduciary Rule #83
Part 85 -The Fiduciary Rule: What’s Next (Part 1)? : Interesting Angles on the DOL’s Fiduciary Rule #85
Part 86- The Fiduciary Rule: What’s Next (Part 2)?: Interesting Angles on the DOL’s Fiduciary Rule #86
Part 87 - The Fiduciary Rule: What’s Next (Part 3)?: Interesting Angles on the DOL’s Fiduciary Rule #87
Part 88 -The Fiduciary Rule: What’s Next (Part 4)? : Interesting Angles on the DOL’s Fiduciary Rule #88