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.
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.”
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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.
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)
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.