Earlier this week the Department of Labor issued a number of proposed rules related to retirement plans, conflict of interest, providing investment advice and the definition of fiduciary. Since the original proposed rule was submitted, back in 2010, there has been extensive debate over the impact of the proposed rule, who it might affect and whether it is actually necessary. The proposed rules are more than 120 pages long and have to be fully digested and evaluated, but it is worthwhile to consider what the new rules will entail and what they will accomplish.
The DOL asserts that the primary purpose of the proposed rule is to ultimately save billions of dollars over the next 10 years. To do this, the DOL contends that the proposed regulations:
Expand the types of retirement advice covered by fiduciary protections by including within the definition of fiduciary any individual receiving compensation for providing advice that is individualized or specifically directed to a particular plan sponsor or plan participant for consideration in making a retirement investment decision; carve out from fiduciary status investment advice provided as general education on retirement savings; carve out order taking as a fiduciary activity, meaning that merely executing a transaction without rendering advice would not be a fiduciary activity; and carve out sales pitches to plan fiduciaries with financial expertise, meaning that, under certain circumstances, the providing of advice under point 1 above would not be considered a fiduciary activity.
One long standing complaint from the DOL is that investment advisers seem to have an inherent conflict of interest in that they are compensated for their advice and may also receive compensation from the providers of the investment products the adviser recommends. The proposed regulations appear to create a concept called a best interest contract exemption which the DOL says will allow firms that would otherwise have this conflict resolved by affirmatively committing to putting the clients best interests first and disclosing all conflict of interest. By doing so, it appears that the ERISA fiduciary prudence standard would then apply to the determination of whether they have acted in their clients best interests. The proposed regulations also have a component that specifically requires the disclosure of conflicts and hidden fees.
Collectively, there are seven separate proposed rules, each dealing with specific components of the fiduciary definitions:
Definition of the Term Fiduciary; Conflict of Interest Rule Retirement Investment Proposed Best Interest Contract Exemption Proposed Class Exemption for Principal Transactions in Certain Debt Securities between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs Proposed Amendment to Prohibited Transaction Exemption (PTE) 75-1, Part V, Exemptions From Prohibitions Respecting Certain Classes of Transactions Involving Employee Benefit Plans and Certain Broker-Dealers, Reporting Dealers and Banks Proposed Amendment to and Proposed Partial Revocation of Prohibited Transaction Exemption (PTE) 86-128 for Securities Transactions Involving Employee Benefit Plans and Broker-Dealers; Proposed Amendment to and Proposed Partial Revocation of PTE 75-1, Exemptions From Prohibitions Respecting Certain Classes of Transactions Involving Employee Benefits Plans and Certain Broker-Dealers, Reporting Dealers and Banks. Proposed Amendments to Class Exemptions 75-1, 77-4, 80-83 and 83-1 Proposed Amendment to and Proposed Partial Revocation of Prohibited Transaction Exemption (PTE) 84-24 for Certain Transactions Involving Insurance Agents and Brokers, Pension Consultants, Insurance Companies and Investment Company Principal Underwriters
As with any set of proposed rules, there will be much debate, comment and analysis before anything is finalized. But the proposed changes are significant and anyone involved in the administration of retirement plans, fiduciaries of these plans and advisers to retirement plans should watch these rules as they develop. Fox Rothschild will continue to monitor these proposed rules and will provide updates as needed to further consider the impact they have on current fiduciaries, as well as those who may yet be defined as fiduciaries in the future.
Keith R. McMurdy is a partner with Fox Rothschild focusing on labor and employment issues; he can be reached at
The information in this legal alert is for educational purposes only and should not be taken as specific legal advice.
