United States

Implementation of the Department of Labor’s conflict of interest rule

INSIGHT ARTICLE  | 

Did you know

  • The new fiduciary rules significantly expand the activities and roles that make someone a fiduciary.
  • Absent an exemption, it is a prohibited transaction under ERISA section 406 for a fiduciary to either receive un-level compensation or provide conflicted advice.
  • Plan sponsors retain co-fiduciary responsibility and liability for the actions of other plan fiduciaries who do not comply with the law.
  • A plan’s fiduciaries are personally liable for any losses resulting from fiduciary breaches.
  • A BIC exemption will be required for plans whose fiduciaries manage under $50 million—this will allow a fiduciary to receive un-level compensation or provide conflicted advice.
  • Receipt of required BIC paperwork is not enough to fully satisfy the exemption. Important aspects of the exemption are ongoing and must be reviewed by plan fiduciaries to ensure compliance.
  • The existence of a BIC does not mean that a recommendation is automatically in the client’s best interests or prudent.
  • The mere existence of needing a BIC should trigger a plan sponsor to consider whether it wants to receive advice from an entity where the potential for conflicted advice exists.
  • Plan fiduciaries must also be wary of service provider communications that could be construed as recommendations to a plan sponsor or plan participant.

The new conflict of interest or fiduciary rule represents the most sweeping Department of Labor (DOL) enactment since the Employee Retirement Income Security Act (ERISA) in 1974. Its implementation date was June 9, 2017.

The intent of the conflict of interest rule is to protect employers and employees by broadening the population of service providers (e.g., investment advisers, consultants, brokers, insurance agents, recordkeepers, third-party administrators, etc.) that must meet ERISA’s fiduciary standard—putting their clients' best interest before their own profits—in making investment recommendations.

Under the new rule, the fundamental threshold element in establishing the existence of fiduciary investment advice is whether a recommendation for a fee occurred. The new rule redefines a recommendation as any communication that would reasonably be viewed as a suggestion to engage in or refrain from taking a particular action. The more individually tailored the communication is to a specific advice recipient or recipients, the more likely the communication will be viewed as a recommendation, and thus trigger fiduciary standards of care.

Absent an exemption, it is a prohibited transaction under ERISA section 406 for a fiduciary to either receive un-level compensation or provide conflicted advice. The new rule establishes a best interest contract (BIC) exemption for plans whose fiduciaries manage under $50 million (in the aggregate). A BIC will allow a fiduciary to receive un-level compensation (such as commissions) or provide conflicted advice (when the amount of the fiduciary’s compensation is affected by the use of its authority in providing investment advice). However, the existence of a BIC does not mean that a recommendation is automatically in the client’s best interests or even prudent. It also does not mean that all aspects of the exemption have been, or are being, met.

While the primary targets of the new rule are service providers, the DOL’s new fiduciary rule creates a series of complicated fiduciary decisions that plan sponsors must make that will affect existing services and create fiduciary risks that plan sponsors may not fully understand.

For example, plan sponsors retain co-fiduciary responsibility and liability for the actions of other plan fiduciaries who do not comply with the law. As such, plan sponsors should consider whether they are comfortable receiving advice from an entity working within the BIC environment—are they familiar enough with the entity to trust them to fully meet the BIC requirements? In addition, plan sponsors must also be wary of all service provider communications that could be construed as recommendations to a plan sponsor or plan participant where the potential for un-level compensation or conflicted advice exists and BIC may not have been implemented.

In times of significant regulatory changes, plan fiduciaries should consider the capabilities of their advisors to assist and support them with fiduciary compliance.

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