Fiduciary “Carve-Outs”

The DOL provides exemptions to the above broad fiduciary rule through “carve-outs.” For example, a person won’t be considered a fiduciary for providing the following investment advice:

  • Statements or recommendations made to a “large plan investor with financialexpertise” by counterparties involved in an arm’s length transaction or a swap or security-based swap that’s regulated under the Securities Exchange Act or the Commodity Exchange Act,
  • Statements or recommendations provided to an ERISA plan fiduciary by an employee of the plan sponsor if the employee receives no fee beyond his or her normal compensation,
  • Marketing or making available a platform of investment alternatives to be selected by a plan fiduciary for an ERISA participant-directed individual account plan, and
  • The identification of investment alternatives that meet objective criteria specified by an ERISA plan fiduciary or the provision of objective financial data to such fiduciary.
  • In addition, the rules carve out a fiduciary status exemption for providing information and materials that constitute investment or retirement education. However, the revised rule prohibits distribution of materials that discuss specific investment products, investment managers, or the value of particular securities or property. If the education includes asset allocation models, those models must be generic and cannot identify specific investments available to plan participants.

Concerns for sponsors

Although the DOL’s reproposed regulations will govern the behavior of investment advisors and financial institutions that provide services to retirement plans and their participants, the rules affect plan sponsors as well, and not always positively. For example, critics argue that the rules will constrain the availability of investment services, particularly for smaller plans, by pushing their regulatory compliance costs unsustainably high.

The DOL has responded to this criticism by stating that the current system in which firms can benefit from hidden fees found in the fine print of retirement investments with high costs and low returns isn’t fair.

SEC gets in the mix

Meanwhile, the Securities and Exchange Commission is planning to propose a fiduciary standard for brokers who recommend investments, whether to individuals or retirement plan sponsors. It’s unclear how those proposals will mesh with the DOL’s proposed regulations. Either way, 2015 is shaping up to be a big year for investment-advice fiduciaries.

 

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