New Department Of Labor Fiduciary Rule: Dawn Of A Brave New World?

New Department Of Labor Fiduciary Rule: Dawn Of A Brave New World?
Riker Danzig Employee Benefits Alert April 7, 2016

On April 6, 2016, the Department of Labor announced its long-awaited, hotly debated and highly controversial rule that expands the responsibilities and potential liabilities of broker-dealers and other investment advisors to employee plans governed by ERISA and to individual retirement accounts (“IRAs”).  

In brief, the new fiduciary rule sweeps into its net advice that formerly was not considered fiduciary investment advice under ERISA, and has been issued in tandem with new or amended prohibited transaction exemptions that  investment advice fiduciaries (and the fiduciaries that hire them) must adhere to, or face liability for noncompliance.

Under the new fiduciary rule, advice provided with respect to employee plans and IRAs in return for a fee will be considered fiduciary investment advice, in general, if it relates to:  (i) recommendations on acquiring, holding, disposing or exchanging plan or IRA assets, or (ii) recommendations on the management of plan or IRA assets (including whether or not to roll over or take a distribution from a plan or IRA, and recommendations as to selection of investment account arrangements and selection of other individuals or entities who will be compensated to provide any of these types of advice).  Certain carve-outs, exclusions and exceptions (including plan information and general investment education) apply.

The related prohibited transaction exemptions require that an investment advice fiduciary comply with a “best interest” standard of conduct.  In brief, the advisor can no longer escape fiduciary liability by providing “suitable” products that generally fit the client’s investment needs and risk tolerance; rather, the advisor must act in the client’s best interests pursuant to a written fiduciary acknowledgment statement or enforceable contract that puts the client’s interests first.  

The new fiduciary rule and related prohibited transaction exemptions impact not only brokers and other advisors, but also the employers and other plan fiduciaries that hire them.  Accordingly, employers and plan fiduciaries should review: 

Requirements of the new fiduciary rule and related prohibited transaction exemptions will be phased in over time (with applicability effective April, 2017, and full compliance effective  January 1, 2018), but the rule also may be challenged in court or by Congress, despite revisions  that the Department of Labor claims will make the rule more palatable to the investment advice industry. 

If you have any questions about the issues mentioned in this Employee Benefits Client Alert, please contact any one of the attorneys in our Employee Benefits and Executive Compensation Practice GroupJames N. Karas, Jr., Robert C. Daleo, Jason D. Navarino.