The Department of Labor’s finalized fiduciary rule is expected to make an impact on the relationships of tens-of-thousands of sponsors with the service providers and advisors to their defined contribution plans.

One thing has not changed, however. Under the Employee Retirement Income Security Act, all sponsors of 401(k) plans have a fiduciary duty to monitor all service providers to their plans, irrespective of whether or not those providers are acting as co-fiduciaries or not.

Because that responsibility has not changed, it is important for sponsors to understand how the rule affects the service providers sponsors are required to monitor.

Pinpointing when a communication to plan participants rises to the level of investment advice was one of the more critical questions emerging from the Department of Labor’s proposed fiduciary rule last year.

Read: Our coverage on the DOL fiduciary rule

When the rule is fully implemented by the beginning of 2018, how providers distinguish communication from advice will be vital for plan sponsors to understand.

As proposed, the rule said any communication to plan participants would be considered fiduciary in nature if it could be “reasonably viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action.”

Many stakeholders argued that that language was too broad.

Particularly, the word “suggestion”—core to how the proposed rule attempted to define fiduciary actions—was so broad that even a “casual conversation between an adviser and a client could constitute investment advice,” argued stakeholders, as explained by the DOL in the preamble of its final rule.

In the end, the DOL kept the original language establishing a communication’s fiduciary threshold, including the word “suggestion.”

In defense of that decision—specifically in keeping the word “suggestion”—DOL said it “does not believe the use of that term in the rule reasonably carries the risk alleged by some commenters,” according to language in the final rule.

But the Department clearly recognized other stakeholders’ concerns that the proposal was too vague in defining what types of communication to plan participants will constitute advice.

To address those concerns, the final rule includes new language to clarify exactly which types of communication would constitute fiduciary advice, and importantly, which types of communication would not.

As far as the DOL is concerned, the final rule makes it clear “that the determination of whether a recommendation has been made is an objective rather than subjective inquiry.”

DOL said the final rule mirrors FINRA guidance on what constitutes a recommendation: The more tailored a communication is to participants about a specific security or investment option, the more likely that communication will be viewed as a fiduciary recommendation.

Also like FINRA’s definition of recommendation, the DOL’s final rule says that a series of communications that may not individually constitute a recommendation could amount to one when viewed together by participants.

Plan sponsors are wise to acquaint themselves with these four areas where the final rule affects service providers’ communications:

1. Communications that do not constitute recommendations

For sponsors, advisors and recordkeepers, perhaps the best way to understand how the DOL rule defines advice is by knowing which actions the Department says do not constitute a direct recommendation to participants.

In simply providing an investment platform for sponsors and participants, recordkeepers are not making recommendations, and therefore not engaging participants as fiduciaries.

That part of the final rule keeps the proposed version’s provider carve out intact, so long as recordkeepers disclose that they are not acting as fiduciaries or intending to give participants specific advice through the platform.

The final rule also reiterates that the common activities of recordkeepers, like assisting fiduciaries in the selection and monitoring of investments, do not rise to the level of advice or recommendations.

Also, service providers can continue to provide objective data on investments without acting in a fiduciary capacity, as well as identifying investments that meet specific plan sponsor requirements.

In clarifying their role in the final rule, DOL said recordkeepers “often provide general financial information that falls short of constituting actual investment advice or recommendations, such as information on the historic performance of asset classes.”

Providers will not be limited as to the types of investments offered or minimum number of options. Specifically, the rule notes that annuities are not prohibited from investment platforms, according to language in the rule.

Not only will the rule’s recordkeeping provisions not be limited to large plans, the DOL acknowledges that some platform offerings can be customized to fit the needs of specific types of businesses and different sizes of plans.

“A platform provider who offers different platforms for small, medium, and large plans would not be providing investment advice merely because of this segmentation,” the final rule says.

Recordkeepers, and their sponsor clients, are issued a caveat by the DOL regarding segmentation: if a provider communicates a specific tailored platform that is appropriate for a specific plan, “the communication would likely constitute advice based on the individual needs of the plan, and very likely be considered a recommendation.”

2. RFPs clarified

When plan sponsors issue a request for proposal from recordkeepers, they foster competition from the market that often results in lower costs and better services for participants, said the DOL in its final rule.

“It was never the intent of the Department to displace common RFP practices related to platforms,” states the final rule, acknowledging that RFPs are central to assure plan sponsors are executing their fiduciary obligations under ERISA.

The final rule does, however, make a significant clarification for recordkeepers in how they can respond to RFPs, particularly when those responses include sample plan investment lineups.

Often, those sample lineups can include specific investment alternatives by name, and examples that are tailored to the specific needs of the plan requesting the proposal.

Going forward, recordkeepers can continue to furnish such specific samples in answering RFPs, provided they disclose any conflicts of interest that may exist with the sample investments suggested, as in the case of revenue sharing agreements or proprietary funds, and give written notification to plan sponsors that the RFP is not intended to serve as a form of advice.

3. Investment education

The final rule notes that plan sponsors have had longstanding fiduciary obligations in selecting and monitoring all plan providers, irrespective of whether or not they offer fiduciary services.

Under ERISA, that obligation extends to providers of educational services to participants.

As far as the education provisions are concerned in the final rule, the DOL doesn’t think the “rule significantly expands the obligations or potential liabilities of plan sponsors.”

One substantial change in the final rule from the proposed version regards asset allocation modeling in education materials.

The proposed version prohibited interactive asset allocation models from using specific investment examples and distribution options, unless participants plugged those options into the interactive models.

Stakeholders argued that prohibiting that extent of modeling would harm participants, and effectively undermine the educational value of modeling tools.

In compromising, the final rule allows for asset allocation models to use specific investments, under certain conditions.

Specific examples must be designated investment alternatives under an employee benefit plan; the investment examples must be subject to fiduciary oversight by a plan fiduciary independent of the provider offering the modeling; the asset allocation modeling must identify all DIA alternatives offered in the plan that have similar risk and return characteristics; and the modeling must include information on where other alternative investments can be found.

While the final rule allows more expansive asset allocation modeling, the DOL notes that plan fiduciaries will have a duty to monitor those models, and determine whether they “are in fact unbiased and not designed to influenced investment decisions towards particular investments that result in higher fees” paid to the providers of the modeling tools, according to the final rule.

4. IRAs not included in provider carve-outs to 401k plans

The latitude plan providers have in offering investment platforms to 401(k) participants, most of which remains unchanged from the proposed rule’s carve-outs, does not extend to the IRA market, as some stakeholders had hoped for.

The final rule is clear in the role it says plan fiduciaries play in interacting with recordkeepers to the benefit of plan participants.

But with IRAs, “there typically is no separate independent fiduciary who interacts with the platform provider to protect the interests of the account owners,” says the final rule.

If the provisions afforded recordkeepers in creating platforms for plan fiduciaries were extended to the individual IRA market, the DOL says there would be too much risk for abuse, and that fiduciary recommendations to individual IRA accounts would be shielded from the final rule’s overarching best interest objective.

Instant Insights /

Advice vs. education: 4 things plan sponsors must monitor under the fiduciary rule

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