2: Ask detailed questions of their advisors to understand the potential for biased or conflicted advice.

Who is a fiduciary and what causes you to become one?

Originally, to be considered a fiduciary, an advisor's activity had to meet all five of the criteria in Figure 1 below.

Many advisors argued they were exempt because their advice didn't meet one or more of the criteria — for example, non-regular one-off transactions.

These exceptions no longer apply.

Even if advice is not provided regularly or used as the primary basis for decisions, the advisor is now subject to fiduciary liability and compliance requirements.

Figure 1: Criteria to be Rendering "Investment Advice"

Implications for plan sponsors: "Education" versus fiduciary "advice"

The new provisions contain several exceptions which characterize various acts as "education" rather than "advice." (See Figure 2 below.)

Plan sponsors can still provide education to plan participants while avoiding liability and compliance risks associated with providing advice to individual participants, but requirements have changed.

Figure 2: Criteria for Sample Portfolios to be Considered Education and not Advice

Plan sponsors should review and/or update education materials that make any reference to hypothetical portfolios.

Fiduciary liability extends to IRA rollovers: Advice and compliance requirements now extend to advising individuals on IRA rollovers. Plan sponsors should review participant communications on rollovers. This includes materials and scripts used by third parties.

Relief and exceptions to protect employers and staff: The DOL specifically exempts certain employees when providing advice as part of their employment. If an employee is not receiving supplemental compensation for providing advice and operating within the scope of his or her job, the fiduciary rule generally doesn't apply. Employees who create reports or make recommendations for their company's plan are also generally exempt.

Implications for consultants: What's allowed, what's not allowed

Existing law states that fiduciaries must always act in the best interests of plan beneficiaries above other parties. For example, fiduciaries cannot choose to purchase plan assets from themselves. They also cannot receive commissions related to plan transactions. These activities are viewed as inherently conflicted.

Does the new rule eliminate conflicted activities such as receiving commissions or selling proprietary products? No. These acts are still allowed but are subject to an expanded set of rules:

The broadest allowed exception is the "Best Interest Contract Exemption" or "BICE." The BIC exemption permits advisors to engage in conflicted activities if they:

1. Acknowledge fiduciary status

2. Adhere to the "Impartial Conduct Standards" which require that they:

• Give advice in the best interest of the retirement plan investor without regard to the advisor's or advisor firm's interest.

• Charge no more than reasonable compensation

• Make no misleading statements and disclose all conflicts of interest

3. Implement policies and procedures reasonably and prudently designed to prevent violations of the Impartial Conduct Standards

4. Refrain from giving or using incentives for advisors to act contrary to the customer's best interest; and fairly disclose compensation and material conflicts of interest. (Examples of incentives include quotas, appraisals, bonuses or other compensation.)

Advisors who conform to these standards are still allowed to accept a wide variety of compensation that would otherwise be prohibited. Different compensation for different products is still allowed if it doesn't "tend to encourage" biased recommendations. Firms can pay individual advisors higher fees for different products, if those fees can be justified based on time, effort or complexity.

Questions plan sponsors should ask their advisors about the Best Interest Contract Exception

Advisors may continue to receive compensation that varies with the types of investment selected by plan sponsors. This presents a conflict of interest.

They still can limit menus of products or solutions to clients. Plan sponsors cannot rely on the rule as a guarantee they will receive unbiased advice.

Suggested questions to ask about varying compensation for different investments:

• "What is your compensation for the investments recommended?"

• "Are there other investments options that can be provided at a lower compensation rate and lower all-in cost?"

• "What is the rationale for different compensation for these investments?"

Suggested questions to ask about limited or proprietary menus of solutions:

•  "What limitations exist on the types of available investments?"

•  "Are there other investments available outside of your platform that may be more effective?"

•  "How does an investment become available on your platform? What prevents investments from becoming available?"

Questions plan sponsors should ask (or already know) regarding principal transactions

A principal transaction is directly adversarial. If the plan sponsor is a buyer, it wants a low price. The seller wants a high price. If the plan sponsor is a seller, it wants a high sales price. The buyer wants a low price.

The DOL seems to appreciate the strong conflict of interest in a principal transaction. The Best Interest Contract Exemption may not be used for principal transactions.

Advisors looking to execute principal transactions with their clients must rely on a specific Principal Transactions Exemption or other specific exemptions provided.

Types of principal transactions allowed

Four major types of principal transactions are allowed under the exemptions.

1. Purchases of certain debt securities

2. Sales of securities or real property

3. Certain insurance, annuity or mutual fund products

4. "Riskless" principal transactions are also allowed

The original DOL proposal contained a requirement that mark-ups and mark-downs on riskless principal transactions be disclosed to clients. That requirement does not exist in the final version.

Suggested questions to ask about transactions:

• "What mark-up or mark down rates are you charging for riskless principal transactions?"

• "How do you prevent excessive transactions from being recommended or implemented?"

• "What is your total compensation for principal transactions you have conducted with us?"

What investors need to know: commission-free arrangements

Over time, commission rates have fallen. However, markets have become increasingly complex.

Many brokers will take client orders and sell them to third parties or will execute client orders against their own inventory (known as "internalization").

Commission-free does not necessarily mean free

Investors cannot prudently accept "commission-free" as free. Investors should ask deeper and more precise questions of any consultant which executes trades for its clients.

Suggested questions to ask about order flow:

• "Do you internalize order flow from clients? Would you internalize our order flow?"

• "Do you sell client order flow to internalizers or other entities? Please provide a copy of your SEC Rule 606 disclosure and details of your order flow arrangements."

Looking ahead: 3 items plan sponsors need to evaluate

In the near term, we recommend plan sponsors evaluate three key issues that may directly impact them.

1. Review existing employee education materials to confirm compliance with the new rule.

2. Review internal employee activities related to the plan and assess any potential compliance risks under the new rule.

3. Ask specific questions of their ERISA counsel, recordkeeper and consultants.