New DOL conflicted-advice regulation-from a plan sponsor viewpoint

Apr 11, 2016
Apr 11, 2016
0 min. read

The U.S. Department of Labor (DOL) recently issued its long awaited conflicted advice regulations. While these regulations and related prohibited transaction exemptions primarily affect the actions of investment advisors, plan sponsors must develop an understanding of how these new requirements may affect the operation of their 401(k) or other retirement plans. These new regulations are generally effective as of April 10, 2017, with certain provisions not fully effective until Jan. 1, 2018.

Although the DOL’s role is not in the tax system, the IRS and the DOL have a unique shared jurisdiction with respect to employee benefit plans sponsored by employers. In this regard, the DOL has the authority to issue interpretations involving the prohibited transaction provisions of section 4975. Thus, the DOL’s jurisdiction on prohibited transactions extends to transactions involving individual retirement accounts (IRAs) even though the DOL would not normally have any jurisdiction over these plans.

Why the DOL issued the regulations

The biggest change the regulations make to the investment environment is the new definition of who is a fiduciary investment adviser. What may surprise many plan sponsors is that, prior to the issuance of this regulation, most individuals that sold investments to retirement plans were not fiduciaries, and thus, had no duty to act in the best interest of their clients. An advisor employed by an insurer, mutual fund or brokerage firm was generally not subject to a fiduciary standard—his or her only requirement was to make suitable investment recommendations. In that regard, the advisor was not required to consider or disclose to the client that he or she may receive greater compensation from one recommendation as opposed to another suitable alternative. With the shift away from defined benefit plans over the past few decades, employees who have little financial knowledge are often the parties making investment decisions based on this advice and who could be financially harmed by advice given with potentially misaligned intentions.

New fiduciary definition

Under the final regulation, a person is a fiduciary if both of the following are met:

  1. The person either directly, or in conjunction with others (e.g., an affiliate), provides advice for a fee or other compensation (direct or indirect) to a plan, plan fiduciary, plan participant or beneficiary, IRA or IRA owner and that advice consists of a recommendation:

    (a) As to the advisability of acquiring, holding, disposing of or exchanging securities or other investment property, or a recommendation as to how securities or other investment property should be invested after the securities or other investment property are rolled over, transferred or distributed from the plan or IRA, or

    (b) Regarding the management of securities or other investment property, including, among other things, recommendations on investment policies or strategies, portfolio services, selection of investment account arrangements (e.g., brokerage versus advisory), or recommendations with respect to rollovers, transfers or distributions from a plan or IRA, including whether, in what amount, in what form, and to what destination such a rollover, transfer or distribution should be made.

  2. The person making the recommendation meets any of the following conditions:

    (a) It acknowledges or represents that it is a fiduciary (under either the Internal Revenue Code or the Employee Retirement Income Security Act);

    (b) Gives advice under a written or verbal agreement, arrangement or understanding that its advice is based on the particular investment needs of the advice recipient; or

    (c) Directs the advice to a specific advice recipient(s) regarding the advisability of a particular investment or management decision with respect to securities or other investment property of the plan or IRA.      


The DOL clarified in the final rules that they do not apply to health, disability and term life insurance policies, therefore, the impact falls mostly on retirement plans. Within this context, though, the regulations acknowledge that not all communications constitute a recommendation. The DOL has specifically made exceptions from the definition of providing fiduciary investment advice that will allow service providers and plan sponsors to provide educational information and materials to plan participants and for recordkeeping firms to offer a selection of investment alternatives (an investment platform). In addition, employees of the plan sponsor who communicate plan information, develop reports and recommendations are not fiduciaries if they meet certain requirements.

Impartial conduct standards

Under section 4975, unless the fee arrangement meets certain exemption requirements, it is a prohibited transaction for a fiduciary to receive compensation from plan assets. Simultaneously with issuing the regulation, the DOL modified the existing prohibited transaction exemptions to provide that the exemptions are only available to those investment fiduciaries that act in the best interest of the plan or IRA with which they are dealing, charge no more than reasonable compensation, and that do not make misleading statements to the plan or IRA.

Impact on plan sponsors

It is important to remember that as a plan sponsor, an employer is already a fiduciary to its own 401(k) or retirement plan. Therefore, an employer has an affirmative duty to understand the nature of its relationships with all of the plan’s service providers, and now that the rules are changing for providers of investment advice, employers need to:

  1. Understand whether the plan’s investment advisor is currently acting as a fiduciary
  2. If the advisor has not been acting as a fiduciary, develop a timeline for when and how the advisor will transition its services to a fiduciary investment advisor model

A change in an existing advisor relationship to an investment fiduciary-based model may require more than just receiving and reviewing new account documents and disclosure statements. In many cases, in order for the advisor to meet the impartial conduct standards, more substantive changes, such as transitioning from a commission-based to a fee-based arrangement, will be necessary.  

The regulations will require substantial changes to the business models of many firms that provide services to 401(k) and other retirement plans. This change for the plan’s investment advisor to act as a fiduciary, while potentially cumbersome for plan sponsors in the short-term (having to review new documents, etc.), should be beneficial to both plan sponsors and participants in the long-term.

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