Insights from the experts in investment fiduciary responsibility.

Follow up Q&A from our DOL rule webinars: Plan Services

Posted by Duane Thompson on April 27, 2016

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Two weeks ago, we presented two webinars on consecutive days covering the DOL’s recently released fiduciary rule. A recording of that webinar is now available. During that webinar we received over 80 questions. We were not able to answer all of those during the one hour session, but we have compiled and answered them here. The questions are categorized, and we will do separate blog posts during the week to address all of the questions within a given category. These questions are not comprehensive of the rule, they only address the questions that were submitted. Think of them as an addendum to the webinar. For a more comprehensive view of the rule, we recommend you view the recording, as well as download our Executive Summary and Client Memo documents.

In our second Q&A blog post from the webinar, we are tackling each question that has to do with offering plan services under the new rule. Please note: the views expressed herein are strictly informational, do not represent an official position of fi360 on regulatory or legislative matters, and should not be relied upon as legal, compliance or investment advice. 

Q: Can a commission-based "broker" collect 12b-1 fees from a plan under the education exemption, i.e., it’s possible for brokers to restructure their service offering?
A: Unless the broker or his firm is already a fiduciary to the plan, it’s possible that he could accept 12b-1 fees under the education exemption.  However, his compensation would have to be reasonable.  In addition, he would have to stay within the boundaries of the carve-out by engaging only in non-fiduciary communications (i.e., purely education and not investment advice). 

Q: If you are a fiduciary to a plan and get paid a level fee, and then are paid a separate flat fee in helping the plan sponsor move to a new platform provider, can you do so under the new Rule?
A: The Rule probably does not apply to the situation you describe.  You are already an ERISA fiduciary, so nothing changes in that regard.  Consistent with ERISA requirements, your compensation must be reasonable. 

Q: As a 401(k) advisor, can an RIA be a plan as well as participant advisor? Not so for commissioned-based or BD rep? 
A: Many RIAs have advised both plans and participants for many years under existing regulation.   Commission-based brokers could advise plans previously as non-fiduciaries under other exemptions.  And under the DOL’s 2011 fiduciary advisor rule they could advise participants.  Both RIAs and BD reps can advise plans and participants under the new Rule, but brokers in particular may be subject to a fiduciary standard once the Rule goes into effect. 

Q: Are you basically saying that all advisors to small plans under $50 million in assets are fiduciaries?
A: Yes.  There is no ‘incidental advice’ carve-out available for small plans as there is for platform providers and sellers of investment products to larger plans.  The DOL considers the small plan sponsors to be “retail” investors, treated just like individual plan participants and IRA account holders.

Q: Where does a brokerage account in which individual stocks are traded fall in the scope of the new rule? Would BICE need to be in place to cover this account?
A: If the brokerage account is a taxable account, it is not covered by the Rule.  Nor are self-directed trades by the retirement investor in any kind of account.  However, a broker receiving variable compensation for advising a participant trading individual securities in a brokerage window of an ERISA plan may be subject to BICE.  A brokerage account inside an IRA would clearly be subject to BICE.

Q: If an RIA is providing managed investment models as a 3(38) under a 401(k) plan, can an IAR of that RIA acting as a consultant to the Plan and receiving an advisory fee from the plan -- without any cross-sharing fees -- be acceptable under current rules as well as the new regulation?
A: As far as the DOL is concerned, the RIA and IAR are part of the same entity.  It sounds like any potential problems that might arise would involve questions around disclosures, supervision of the IAR by its firm, and whether the IAR’s advisory fee is reasonable in light of the other services provided to the plan.  You would need to consult with counsel regarding the specific facts involved.

Q: Just to confirm for ERISA plans, the broker suitability standard is no longer an option?
A: It is not an option if the broker meets the definition of a fiduciary.  The DOL’s Impartial Conduct Standards include a suitability requirement based on ERISA’s longstanding prudent investor standard but it is generally tougher than the broker suitability standard because DOL’s rule requires brokers to also adhere to a best-interest standard.  This standard has been incorporated into existing PTEs and the new BIC and Principal Trading Exemptions.

Q: So advice to participants of small plans (under $50MM) is exempt from the fiduciary definition or covered under the DOL rule? What happens to participants over $50MM?
A: Advice for compensation to participants is generally subject to the fiduciary definition no matter the size of the plan.  You may be confusing the fact that brokers who wish to receive commissions for their investment advice (they are already fiduciaries), can rely on BICE and avoid a prohibited transaction when providing investment advice to small plans.

Q: What will be the impact on plans that allow outside brokerage accounts held at wirehouse firms?
A: If you mean 401(k)-type plans that have brokerage windows, investment recommendations are subject to the same fiduciary standard as designated investment alternatives. 

The one impact to consider is that in the context of an investor education seminar for plan participants, it is unlikely that the firm’s advisor would be able to use any individual securities from the brokerage window in an asset allocation model or interactive investment materials – only the designated investment alternatives in the plan – and only under certain conditions.

Q: How would SEP IRA, SIMPLE IRA, individual (k) plans used traditionally by small business owners work under BICE?
A: An exemption from the definition of fiduciary under the Rule is not available for investment advice provided to ERISA plans and IRAs with less than $50 million in assets.  However, the BIC Exemption would be available for firms receiving commissions or other third-party compensation to these plans.

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