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January 20, 2017
Second DOL FAQ on Fiduciary Rule Addresses Questions About Fiduciary Communications

By Jane Meacham, contributing editor

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The U.S. Department of Labor (DOL) released the second set of frequently asked questions (FAQs) for retirement plan professionals on the agency’s complex new fiduciary rule just days before the end of the Obama administration in an effort to answer plan practitioners’ questions about how the rule draws lines between fiduciary and nonfiduciary communications, education, and advice.

communicationThe Trump administration is expected to seek significant changes or termination for the regulation that takes effect April 10, although no specific statements outlining such plans had been made as of Inauguration Day on January 20.

What the New FAQ Covers

The 17-page document on fiduciary communications released January 16 poses and answers 35 questions that deal with technical questions raised by financial service providers. The FAQs are generally limited to investment advice concerning Employee Retirement Income Security Act-covered plans, individual retirement accounts (IRAs), and other plans covered by Section 4975(e)(1) of the federal tax Code.

It followed the DOL’s first FAQ on the new rule issued October 27, 2016, which focused on the rule’s Best Interest Contract (BIC) Exemption and prohibited transaction exemptions.

The DOL’s Employee Benefits Security Administration (EBSA) also posted a 16-page FAQ addressing consumer concerns and protections for worker and plan participants that are part of the planned fiduciary rule changes.

The practitioner FAQs cover investment recommendations covered under the rule, investment education, general communications, transactions with independent fiduciaries with financial expertise, marketing platforms for individual account plans, and providing assistance in selection and monitoring investment alternatives.

Its responses address some specific misunderstandings about the rule in the plan sponsor and service provider community, and seem aimed at changing practitioner and public perception of the controversial regulation.

For example, Question 3 (Q3) explains that an employee of a financial adviser who prepares reports, recommendations, and other materials for the adviser is not a fiduciary so long as he doesn’t make recommendations directly to the IRA owners, plan fiduciaries, or participants.

In another case, the FAQ clarifies in Q1 that it is very easy to overstep into the territory of fiduciary advice: “Providing a selective list of securities to a particular advice recipient as appropriate for that investor would be a recommendation as to the advisability of acquiring securities even if no recommendation is made with respect to any one security.”

In Q30, the agency said that the fact that investment alternatives are provided through a group annuity contract does not, in and of itself, exclude the insurance company offering the annuity from taking advantage of the so-called platform provider provision of the rule, which allows marketing of such contracts to plans without bestowing fiduciary status on the contract provider. That clarification will be seen as favorable for both annuity providers and employer plans that want to incorporate them into their 401(k)s.

Tailored Advice Often ‘Recommendation’

Generally, “[t]he more individually tailored the communication is to a specific advice recipient or recipients, the more likely the communication will be viewed as a recommendation.”

EBSA in the FAQ reinforced the idea that, in order for a recommendation to constitute fiduciary investment advice, it must be a recommendation on the advisability of buying, holding, selling, or exchanging securities or other investment property. This includes recommendations on investment of securities or other property after the securities are rolled over, transferred, or distributed from a retirement plan or IRA.

The DOL goes on to explain that the revised fiduciary rule “provides for clarifications of communications that do not constitute recommendations and for communications that are excluded from the operation of the rule even though they may technically rise to the level of recommendations.”

Jane Meacham is the editor of BLR's retirement plan compliance publications. She has nearly 30 years' experience as a writer/editor of financial services news.

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