The June 9 implementation date of the fiduciary rule’s impartial conduct standardswill require advisors to 401(k) plans with less than $50million in assets to act in their clients’ best interests.

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Although much of the rule’s impact will be borne byadvisors and plan record keepers, the expanded definition of afiduciary will affect plan sponsors, who have been held asfiduciaries since the Employee Retirement Income Security Act waspassed more than 40 years ago.

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Exactly how the impartial conduct standards requirement willimpact employers is subject to debate, and in the view of some, hasleft the employer community in an uncomfortable state of limbo.

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“The latest move by the DOL only provides greater uncertainty onthe future of the rule, which ultimately impacts plan sponsors andthe services provided to plan participants,” said Will Hansen,senior vice president of retirement policy at ERISA IndustryCommittee, whose members include large plan sponsors.

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“Employers are concerned with the potential for a sudden changein services provided to plan participants from record keepers, withlimited time to supplement those services,” added Hansen.

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Some employers are mistakenly operating under the presumptionthat the rule will have little consequence on how they administerplans, given that they are already fiduciaries.

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That indifference could invite new angles of liability, saysDuane Thompson, a senior policy analyst for fi360, a provider offiduciary compliance services for advisors and plan sponsors.

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“Plan sponsors can’t just have a lazy eye and think this ruledoesn’t affect them because they already are fiduciaries,” Thompsontold BenefitsPRO. “They need to understand the parts of this rulethat can come back and bite them if they’re not careful.”

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As fiduciaries, employer sponsors are legally obligated toprudently select and monitor all plan service providers.

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Come June 9, the challenge for sponsors will be understandingwhen their record keepers and advisors are acting as fiduciaries,and which services or actions may be provided under the rule’scarve-outs.

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“For some sponsors that can be confusing, because like retailclients, they implicitly assume plan providers are working inparticipants’ best interests,” said Thompson.

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If a call center employee is accused of giving fiduciary level advice that fails the impartial conduct standards required on June 9, then the sponsor faces potential liability for having failed its duty to monitor the provider. (Photo: Getty)

Heightened monitoring responsibilities on serviceproviders

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One of the rule’s primary purposes is to assure that 401(k)investors don’t receive conflicted advice when it comes time toroll over assets to IRAs.

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When Labor amended and delayed the first scheduledimplementation date to June 9, it relieved the regulated communityfrom the requirement of explaining to investors and employers, inwriting, their role as fiduciaries.

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That was pushed off until January 1, 2018, when the thrust ofthe rule is scheduled for implementation. By then, any advice onrollovers will be a fiduciary act, and must be accompanied by acomparative analysis of why the decision to roll over assets, orleave them in plan, satisfies the best interest standard.

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That comparative analysis is not required for rollover decisionson June 9. But giving prudent advice that is in the best interestof investors is. In order to assure that the latter standard ismet, Thompson says employers should give consideration to goingbeyond what is required to make sure they are not invitingfiduciary risk.

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“How do you meet a prudent standard on rollover advice without acomparative analysis? Sponsors would be crazy to not keep recordsof how participants are engaging with record keepers and planadvisors on rollover advice,” said Thompson.

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The risk for sponsors is their obligation to monitor planproviders.

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If a call center employee is accused of giving fiduciary leveladvice that fails the impartial conduct standards required on June9, then the sponsor faces potential liability for having failed itsduty to monitor the provider. Sponsors also share co-fiduciaryliability with 3(21) and 3(38) advisors.

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Dominic DeMatties, a partner in Alston & Bird’s employeebenefits practice, says the most proactive sponsors are aware ofhow the June 9 impartial conduct standards rule will change recordkeepers’ services, and are going to the extent of changingcontractual agreements to assure protections.

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But others are lagging. “It’s a little hit or miss,” saidDeMatties. “I’m concerned there’s a lack of awareness amongsponsors, and what might be communicated in call centers.”

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HR will have to be careful not to be overly helpful and step over the fiduciary boundary. (Photo: Getty)

Heightened monitoring responsibilities on HR

The rule attempts to clearly separate non-fiduciary investmenteducation from fiduciary recommendations.

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Any communication that would “reasonably be viewed as asuggestion that the advice recipient engage in or refrain fromtaking a particular investment-related course of action” isregarded as a fiduciary recommendation, according to a LaborDepartment FAQ.

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Beyond the rule’s education carve-out, the Labor Department hasissued FAQs intended to quiet concerns that sponsors and humanresource team members may be subjecting themselves to fiduciaryliability even by communicating in vanilla “benefits-speak” withplan participants.

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In one FAQ, Labor says an employer can recommend that aparticipant increase contributions to maximize the employer match,without making a fiduciary recommendation. In order to rise to thelevel of a fiduciary recommendation, the one giving the advice mustreceive a fee or other compensation, and employers, and their HRteams, are not compensated for recommending higher contributionrates.

How far does an employer's fiduciary risk go?

Notwithstanding the guidance, DeMatties says many open questionsremain as to how far an employer’s fiduciary risk runs relative tohow HR team members interact with participants.

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“If an employee tells a participant they should really thinkabout contributing at least 3 percent to get the full match, isthat a fiduciary recommendation? Based on the rule’s definition, itsure sounds like a suggestion to the participant to do something,”noted DeMatties.

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From a liability standpoint, DeMatties is concerned that theintricate language in the rule itself could be interpreteddifferently from the hypothetical scenarios presented in the FAQsand other guidance.

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“The FAQs won’t protect a sponsor—even something an FAQ says isacceptable, the rule will trump it,” he said.

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If an HR representative were to only communicate the naked factsof plan investing to participants, then that would be hard foranyone to construe as fiduciary advice, says DeMatties.

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The problem and challenge for plan sponsors will be setting hardrules for how HR teams communicate with participants, andmonitoring those interactions.

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“If you work in HR you make your living trying to helppeople—that’s why companies sponsor benefit plans. But it’s humannature to not stop, and to give more information to helpparticipants connect the next dot—‘you should be contributing thismuch’. Doing so may ultimately be enough to cross the fiduciaryline,” explained DeMatties. “It’s slippery ground if people are notvery careful in what they say.”

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Whether or not sponsors will face new avenues of litigation under the rule remains to be seen -- but the rule does add to the list of potential violations that can be very hard to defend. (Photo: Shutterstock)

Protection amid the uncertainty

Admittedly, DeMatties says much of the speculation on newliability is theoretical. Whether or not sponsors will face newavenues of litigation under the rule remains to be seen.

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But the rule does add to the list of potential violations thatcan be very hard to defend, he says.

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As Labor undertakes its review of the rule, many are expectingit will ultimately be amended. DeMatties even thinks the impartialconduct standards requirement, set for enactment in a bit over aweek, could be amended, but most likely at the margins.

What plan sponsors can do

Meantime, sponsors will have to ride out the uncertainty.

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But they are not without recourse. Sponsors can ensure they arein communication with service providers, understand how servicesare changing, and add protections in contracts.

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And they can ensure clear policies are in place with respect tothose members of HR that have direct contact with planparticipants, said DeMatties.

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Related: Read more on the fiduciary rule

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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.