Last week, the Department of Labor (“DOL”) issued final regulations that expand the situations under which individuals and entities that provide investment advice and direction will become subject to ERISA’s fiduciary standards.  Although this change may have significant consequences to providers of financial advice to individual retirement accounts (“IRAs”) and some small plans, it should have minimal impact on large or sophisticated plans and their fiduciaries.

Scope of Regulations.  The new regulations address a single question – Who is an ERISA fiduciary?  As part of that analysis, the regulations also address – What services constitute fiduciary advice?  They do not address the scope of ERISA fiduciary duties or how those duties may be satisfied.  The responsibilities of existing ERISA fiduciaries are not changing.

Background.  Individuals and entities can be ERISA fiduciaries under three circumstances:  (i) they are named as fiduciaries in the plan document, (ii) they exercise discretionary control of the operation or assets of the plan, or (iii) they provide investment advice with respect to any assets of the plan for a fee.  The new regulations address only the third category of fiduciaries.  Anyone who was already a fiduciary under the first two categories will continue to be so.

In the past and until April 10, 2017, when the new regulations take affect, a person who satisfies all of the following would be an ERISA fiduciary due to providing investment advice:

• • 1. He or she makes recommendations on investing in, purchasing or selling securities or other property, or gives advice as to their value;
    2. On a regular basis;
    3. For a fee;
    4. Pursuant to a mutual understanding that the advice;
    5. Will serve as a primary basis for investment decisions; and
    6. Will be individualized to the particular needs of the plan.

New Structure.  Effective April 10, 2017, the new regulations replace the above criteria with a new framework that focuses on (i) the nature of communications that constitute investment advice, and (ii) the relationship between the individuals or institutions giving the advice and the plan participants, IRA owners, and plan fiduciaries who receive it.

• • Covered Advice. Under the new definition, investment advice is generally any recommendation, for a fee or other compensation, as to whether to buy, hold, or sell certain stocks, mutual funds, or other investments.

• • Broad Definition of “Recommendation”.  For purposes of identifying covered investment advice, a very wide range of activities may constitute a recommendation.  Specifically, recommendations include any communication that would reasonably be viewed as a suggestion that the recipient engage in or refrain from taking a particular course of action.  For example, providing a list of appropriate investments can be considering a recommendation even if no specific investment on the list is recommended.

• • Advice Not Covered by the Rule. The final regulations provide clarification as to activities that will not constitute investment advice.  For example:
    • • Advisors may provide materials describing strategies for managing assets in retirement, the benefits of participating in a retirement plan, investment objectives and philosophies, and other general education information without fear that it will constitute investment advice;
    • • Plan sponsors will not be considered investment fiduciaries merely because they hire a service provider to provide investment advice to participants (although the selection and monitoring of service providers itself remains a fiduciary act under existing rules); and
    • • Inadvertent recommendations made by employees of a plan sponsor to other employees (e.g., a human resources employee communicating information to other employees about the plan and distribution options) will not be considered investment advice, as long as (i) the employee’s job responsibilities do not include giving investment advice, and (ii) the employee receives no special compensation.

Covered Plans.  Plans subject to the final regulations include employer-sponsored retirement plans (including SIMPLE-IRAs and SEP IRAs), and IRAs.  Although recommendations as to the purchase of health, disability, and life insurance policies do not constitute investment advice under the final rule, the rule covers recommendations made with respect to assets invested in a health savings account (HSA).

Exemptions. The final rule contains several complicated exemptions that will be more relevant to small plans and IRAs, with the main exemption being the Best Interest Contract Exemption.

Potential Impact on Large Plans. While these rules will have a limited impact on larger plans, two implications for larger plans are:

• • One-time Advice. A consultant who is hired by a plan to provide investment advice on a one-time basis will now be considered a fiduciary.  For example, a consultant who is hired to assist in selecting an annuity provider in connection with the termination of a defined benefit plan will be considered a fiduciary as a result of providing investment advice. Under the prior rule, such a consultant would not have been providing investment advice because the advice was not provided on a regular basis.

• • Steerage. Any recommendation as to the amount and destination of a distribution or rollover from a retirement plan also constitutes investment advice resulting in fiduciary status under the new rule.  The DOL expressed concern that participants can be steered towards investment decisions that are profitable for the advisor, but detrimental to the participant when making decisions with respect to taking a plan distribution and making a rollover to an IRA.  Under the prior rule, such a recommendation would not have been considered investment advice and the advisor would not have been considered a fiduciary.

Contact Information.  For more information, please contact Don Mazursky (404.888.8840), David Putnal (404.888.8836), Toby Walls (404.888.8870) or Alex Smith (404.888.8839).