On Wednesday of next week, the Department of Labor will release its finalized fiduciary rule, according to reporting in The Wall Street Journal.

The rule, more than five years in the making, is expected to have massive implications for advisors to 401(k) plans with fewer than 100 participants or $100 million in assets.

Going forward, those advisors will be expected to function as fiduciaries. Under existing law, broker-dealers not beholden to the fiduciary standard of care codified in the Employee Retirement Income Security Act advise tens of thousands of plan sponsors.

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But it is not only the brokers that are often compensated by commissions on the investment products they recommend that are expected to be impacted. Fiduciary RIAs will also be impacted, as the DOL's rule is expected to fundamentally rearrange how they present IRA rollover advice to plan participants.

Many stakeholders have argued that the DOL's proposal would adversely impact sponsors of plans affected by the proposal's so-called "sellers' carve-out"—the Best Interest Contract Exemption provision.

In some cases, the cost to comply with the rule will be too much for advisors that service smaller plans; in other cases, those costs will be passed on to smaller employers, potentially discouraging many from offering retirement plans, argue opponents of the DOL.

Under ERISA, employers that sponsor a plan of any size must act as fiduciaries. That will not change with the DOL rule, though employers will be responsible to understand the rule's impact on the advisors knocking on their door.

On the eve of the rule's finalization, here is a look at four principles that fiduciaries must keep in mind, as presented in the "Fiduciary Management Handbook" issued by Principal Financial Group.

The handbook, it says, "was created to assist plan fiduciaries in identifying and executing their responsibilities in sponsoring a defined contribution plan (such as a 401(k) or 403(b) plan) or a defined benefit retirement plan that is subject to ERISA."

Here's a look at the four guiding principles the handbook presents.

 

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1. Understand responsibilities.

Plan sponsors have some responsibilities that are fiduciary in nature, the handbook points out, but not all of their responsibilities fall into that category.

Knowing the difference is important, as is realizing that they don't relinquish all fiduciary responsibility in appointing another party to act in a fiduciary capacity.

When delegating, the named fiduciary or plan sponsor should use reasonable and informed judgment in choosing or appointing other fiduciaries. He or she should evaluate and monitor the performance of fiduciaries and service providers, on an ongoing basis.

He or she should keep a due diligence file, so that receipt and review of information, and any decisions made, are documented. In addition, he or she should schedule ongoing training about roles, responsibilities and expectations for those involved with the plan, whether they act in a fiduciary capacity or not.

 

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2. Select and monitor investments.

An investment policy statement can help to guide fiduciaries in choosing and monitoring the investments that go into the plan.

Among other things, the investment policy statement should spell out a due diligence process so that it's clear how investments are chosen and which factors contribute to such decisions.

Some considerations are whether to offer a qualified default investment alternative (QDIA) and how the cash is to be managed in an Employee Stock Ownership Plan (ESOP).

While fiduciaries aren't responsible if participants make poor choices among the investment options they are offered, they are responsible if the investment options offered are themselves poor.

And all plan investments must be monitored on an ongoing basis, no matter when they were chosen to be part of the plan. If investment options are to be changed, documentation should explain the reasons for the change and why a replacement was chosen.

 

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3. Communicate and educate.

Employees must be educated about the plan, its features and its offerings—but that is a separate issue from recommendations about offerings.

ERISA defines specific, individualized investment recommendations as investment advice, and anyone providing such advice is considered a fiduciary.

It's helpful to have an education policy statement that spells out goals and guidelines for the plan.

Such a policy statement should also be reviewed periodically, to ensure that it continues to present employees with appropriate levels of knowledge about how the plan works and how best to use its features.

 

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4. Manage prudently.

This governs a range of actions, from when contributions are deposited into the plan to how plan expenses are controlled.

Salary deferral contributions, voluntary after-tax contributions, or participant loan payments via payroll deduction are required to be deposited no later than the 15th business day of the month following the month in which the amounts were withheld from the participants' paychecks.

But in nearly all cases, sponsors must deposit the money far earlier. Small plans—those with fewer than 100 participants—do have an optional safe harbor deposit period of seven business days.

When it comes to fees and expenses, the total dollar amount is not the sole consideration. Another factor is whether the costs are reasonable considering the value received—how beneficial services rendered to employees are, for instance, as well as which services are provided.

Costs should be regularly evaluated—at least every year—and the process should be documented, then kept in a due diligence file.

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