On April 6, 2016, the U.S. Department of Labor (DOL) released its final rule on fiduciary investment advice (Fiduciary Rule) that significantly broadens the types of activities which will qualify as fiduciary investment advice under the Employee Retirement Income Security Act (ERISA).
While the new Fiduciary Rule is primarily focused upon those who provide services to retirement plans and their participants, plan sponsors need to be aware of the regulation’s impact.
Under ERISA, the retirement plan administrator – which is typically the company sponsoring the plan – is legally responsible for all aspects of its management. Therefore, while the plan sponsor may delegate certain functions to vendors (such as a recordkeeper, payroll provider, investment adviser, etc.), it has a duty to the plan’s participants to ensure those vendors are only receiving reasonable compensation, are not operating under any conflicts of interest, and are performing the tasks assigned to them in compliance with the plan’s governing documents.
As a result, retirement plan committees are encouraged to review their fiduciary liability insurance and consider an increase in coverage. This type of coverage is separate from the ERISA fidelity bond which only covers dishonesty and fraud losses.
Under the new Fiduciary Rule, vendors providing investment advice to the plan or its participants will have to provide very detailed disclosures if they are operating under a conflict of interest, such as receiving compensation from the investment products they recommend. By contrast, providers whose advice is free from such conflicts will only need to provide minimal disclosures. Therefore, it is important that plan sponsors understand their duty to avoid conflicts of interest within the plan and review those disclosures carefully.
Consequently, retirement plan committees need to have a firm understanding of the new Fiduciary Rule and implement proper procedures and policies in response to their increased responsibilities.
