The Department of Labor’s finalized fiduciary rule is expected to make animpact on the relationships of tens-of-thousands of sponsors withthe service providers and advisors to their defined contributionplans.

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One thing has not changed, however. Under the EmployeeRetirement Income Security Act, all sponsors of 401(k) plans have afiduciary duty to monitor all serviceproviders to their plans, irrespective of whether or not thoseproviders are acting as co-fiduciaries or not.

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

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Pinpointing when a communication to plan participants rises tothe level of investment advice was one of the more criticalquestions emerging from the Department of Labor’s proposedfiduciary rule last year.

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Read: Our coverage on the DOL fiduciaryrule

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When the rule is fully implemented by the beginning of 2018, howproviders distinguish communication from advice will be vital forplan sponsors to understand.

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

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Many stakeholders argued that that language was too broad.

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

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

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

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

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To address those concerns, the final rule includes new languageto clarify exactly which types of communication would constitutefiduciary advice, and importantly, which types of communicationwould not.

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

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DOL said the final rule mirrors FINRA guidance on whatconstitutes a recommendation: The more tailored a communication isto participants about a specific security or investment option, themore likely that communication will be viewed as a fiduciaryrecommendation.

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Also like FINRA’s definition of recommendation, the DOL’s finalrule says that a series of communications that may not individuallyconstitute a recommendation could amount to one when viewedtogether by participants.

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

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1. Communications that do not constituterecommendations

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For sponsors, advisors and recordkeepers, perhaps the best wayto understand how the DOL rule defines advice is by knowing whichactions the Department says do not constitute a directrecommendation to participants.

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

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That part of the final rule keeps the proposed version’sprovider carve out intact, so long as recordkeepers disclose thatthey are not acting as fiduciaries or intending to giveparticipants specific advice through the platform.

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The final rule also reiterates that the common activities ofrecordkeepers, like assisting fiduciaries in the selection andmonitoring of investments, do not rise to the level of advice orrecommendations.

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Also, service providers can continue to provide objective dataon investments without acting in a fiduciary capacity, as well asidentifying investments that meet specific plan sponsorrequirements.

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In clarifying their role in the final rule, DOL saidrecordkeepers “often provide general financial information thatfalls short of constituting actual investment advice orrecommendations, such as information on the historic performance ofasset classes.”

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

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Not only will the rule’s recordkeeping provisions not be limitedto large plans, the DOL acknowledges that some platform offeringscan be customized to fit the needs of specific types of businessesand different sizes of plans.

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

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

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2. RFPsclarified

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

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

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

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

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Going forward, recordkeepers can continue to furnish suchspecific samples in answering RFPs, provided they disclose anyconflicts of interest that may exist with the sample investmentssuggested, as in the case of revenue sharing agreements orproprietary funds, and give written notification to plan sponsorsthat the RFP is not intended to serve as a form of advice.

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3. Investment education

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The final rule notes that plan sponsors have had longstandingfiduciary obligations in selecting and monitoring all planproviders, irrespective of whether or not they offer fiduciaryservices.

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Under ERISA, that obligation extends to providers of educationalservices to participants.

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

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One substantial change in the final rule from the proposedversion regards asset allocation modeling in educationmaterials.

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The proposed version prohibited interactive asset allocationmodels from using specific investment examples and distributionoptions, unless participants plugged those options into theinteractive models.

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Stakeholders argued that prohibiting that extent of modelingwould harm participants, and effectively undermine the educationalvalue of modeling tools.

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

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Specific examples must be designated investment alternativesunder an employee benefit plan; the investment examples must besubject to fiduciary oversight by a plan fiduciary independent ofthe provider offering the modeling; the asset allocation modelingmust identify all DIA alternatives offered in the plan that havesimilar risk and return characteristics; and the modeling mustinclude information on where other alternative investments can befound.

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While the final rule allows more expansive asset allocationmodeling, the DOL notes that plan fiduciaries will have a duty tomonitor those models, and determine whether they “are in factunbiased and not designed to influenced investment decisionstowards particular investments that result in higher fees” paid tothe providers of the modeling tools, according to the finalrule.

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4. IRAsnot included in provider carve-outs to 401k plans

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

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The final rule is clear in the role it says plan fiduciariesplay in interacting with recordkeepers to the benefit of planparticipants.

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

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If the provisions afforded recordkeepers in creating platformsfor plan fiduciaries were extended to the individual IRA market,the DOL says there would be too much risk for abuse, and thatfiduciary recommendations to individual IRA accounts would beshielded from the final rule’s overarching best interestobjective.

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Nick Thornton

Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.