Close Close

Regulation and Compliance > Federal Regulation > DOL

DOL releases fiduciary rule guidance specifically for advisors

Your article was successfully shared with the contacts you provided.

The Department of Labor has issued back-to-back guidance, in the form of frequently asked questions, for advisors as well as investors regarding its fiduciary rule, which takes effect on April 10.

Related: DOL releases fresh fiduciary rule FAQ for investors

On Friday, DOL released a 17-page FAQ that included 35 questions and answers related mainly to advisors, covering the various provisions of the rule that “draw lines between fiduciary and non-fiduciary communications,” the FAQ states.

At the same time was the release of a 16-page FAQ, which includes 30 questions and answers that Phyllis Borzi, assistant secretary of Labor for the Employee Benefits Security Administration, said are meant to answer questions “especially for workers and retirement investors.”

DOL notes that like the FAQs issued on Oct. 27 on the Prohibited Transaction Exemptions, the FAQ for advisors focuses particularly on specific technical questions raised by financial service providers, and it is limited to investment advice concerning plans covered under the Employee Retirement Income Security Act, IRAs and other plans covered by Section 4975(e)(1) of the Internal Revenue Code.

Related: DOL releases first fiduciary rule FAQs

Fred Reish, partner in Drinker Biddle & Reath’s employee benefits and executive compensation practice group in Los Angeles, notes that the just-released FAQ “provides clarity on issues that some in the private sector have struggled with,” and includes a “few pleasant surprises” and one “disappointment.”

For instance, Reish said that Question 30 says that a group annuity contract can be considered a “platform or similar mechanism,” as opposed to an investment, notwithstanding the annuity component of the group annuity contract.  

“As a result, insurance companies can market their group variable annuity contracts to 401(k) plans without concern of fiduciary status due to the annuity component,” Reish explains. “That issue had been a worry and it’s good to have a favorable conclusion.”

Question 3 is also helpful, Reish said, in that it “clarifies that an employee of an advisor who prepares reports, recommendations and other materials is not a fiduciary so long as he doesn’t make recommendations directly to the IRA owners, plan fiduciaries or participants.”

According to benefits attorney Fred Reisch: 'Insurance companies can market their group variable annuity contracts to 401(k) plans without concern of fiduciary status due to the annuity component.' (Photo: iStock)According to benefits attorney Fred Reisch: ‘Insurance companies can market their group variable annuity contracts to 401(k) plans without concern of fiduciary status due to the annuity component.’ (Photo: iStock)

A “favorable surprise” was noted in Question 24, Reish said. The Q & A states that “if a representative of a recordkeeper meets with a fiduciary advisor to a plan and with the plan committee, the recordkeeper is entitled to the ‘wholesaler exception’ to the fiduciary rule,” he explained. “That exception is more formally called the ‘independent fiduciary with financial expertise’ provision. We had been concerned that, if the plan committee members heard the recordkeeper’s recommendations, that would make the recordkeeper an investment fiduciary.”

DOL concluded, however, “that when the fiduciary advisor was in the room, the committee would rely on his comments, rather than the recordkeeper’s. I think this “clarification” will be helpful to plan sponsors, advisors and recordkeepers,” Reish said.

One downside, however, came in Question 4, according to Reish.

DOL “confirmed that explaining the need to take required minimum distributions was not fiduciary advice (which is good, but was already clear), but then went on to say that, if a recommendation about how to invest those required distributions was made before the distribution, it was fiduciary advice.”

That means, however, “that if the recommendation is made after the money is in the individual’s personal account, it is not fiduciary advice. What a difference a day makes! I disagree with that conclusion. I believe that, since the distribution is required, any advice would be about how to invest personal money and that, therefore, it should not be fiduciary investment advice.”

As to the FAQ released specifically for investors and workers, Joshua Waldbeser, of counsel with Drinker Biddle & Reath, opines that DOL’s intentions “appear to be not just limited to educating investors about the fiduciary rule generally, but also to address some very specific misunderstandings, and to influence public perceptions” about the rule.      

EBSA’s Phyllis Borzi says the second batch of FAQs are “meant especially for workers and retirement investors.”

DOL emphasized in “several places” throughout the FAQ that the rule doesn’t require IRAs to be switched from commission-based accounts to advisory accounts, he said. “In fact, one of the FAQs goes so far as to state that investors should not ‘believe’ an advisor who tells them that commission-based advice isn’t permitted, or that they have to enter into an asset-based fee arrangement. This also demonstrates the DOL’s ongoing concerns about reverse churning.”

Some statements in the FAQs will also likely be considered “overreaching,” Waldbeser adds. “For instance, one of the FAQs states that investors may consider replacing their advisor with one who is willing to satisfy the ‘best interest’ standard even as to taxable accounts, which aren’t subject to the rule in the first place.”

See also:

Deciphering the DOL rule at NAILBA 35

Annuity sales to plunge under DOL fiduciary rule

DOL 101: The fiduciary rule’s impact on annuity carriers

What’s next for variable annuities after DOL fiduciary rule?

We’re on Facebook, are you?


© 2023 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.