PLANSPONSOR - January - February 2024 - 39

INSIDE ANGLE
The DOL's Not-So-New
Fiduciary Rule
Sponsors should know the implications of the rule, if passed
T
his past Halloween, the Department of Labor again proposed
a new regulation that seeks to significantly expand
the activities that make a person a fiduciary under the
Employee Retirement Income Security Act by providing investment
advice. The department had previously sought to change
the definition of investment advice in 2010 and again in 2016.
The 2016 rulemaking was struck down by the U.S. 5th Circuit
Court of Appeals. Nevertheless, the DOL has again proposed a
substantially similar rule.
Although the proposed rule primarily targets providers of
retirement plan products and services, plan sponsors and fiduciaries
should understand how it affects their plans and their service
provider relationships. The following gives a brief overview of the
proposed rule, as well as a brief description of the key issues plan
fiduciaries should consider.
Direct Impact on Plan Sponsors
The proposed fiduciary rule provides that one becomes an
ERISA fiduciary by, for a fee, making a recommendation to a
plan, plan fiduciary, or plan participant or the person's beneficiary
regarding, among other things, the purchase of investment
products or services and the decisions of whether to take a distribution
from the plan and whether that money should be rolled
into an individual retirement account.
This is a substantial deviation from the department's existing
five-part test and will cause more product and service providers to
be fiduciaries, particularly in the sales context. It will also result
in a facts-and-circumstances-based determination of whether
fiduciary advice has been provided. In general, the proposed rule
should not change routine activities of the plan sponsor.
* Participant education. As was the case prior to the proposed
rule, plan sponsors will be able to continue to provide nonfiduciary
investment education, including to supply general information
about a plan; general financial, investment and retirement
information; hypothetical asset-allocation models; and interactive
investment materials.
* HR employees. Similarly, the DOL was careful to explain
that a plan sponsor's employees who communicate information
about the plan and distribution options to participants are generally
not considered advice fiduciaries. This is good news for the
human resource community, which may have been concerned
about its members' fiduciary status under the new rule.
Ambiguity Abounds for Service Relationships
Notwithstanding the forgoing, service provider relationships may
be substantially altered if the proposed rule is finalized. While
the 2016 rule included several carve-outs from the DOL's broad
definition of fiduciary status, the proposed rule includes no such
carve-out. Instead, service providers could be viewed as fiduciaries
under the new rule for a host of otherwise routine activities for
which plan sponsors regularly engage them. For instance:
* Recordkeeper call centers. Recordkeepers seeking to avoid
fiduciary status may restructure call centers so personnel no longer
provide recommendations to participants seeking assistance.
* Recordkeeper tools. Recordkeepers routinely offer programs
and tools intended to assist participants with their basic questions.
Such programs might help the participant decide whether to take
a hardship distribution or how to draw down a plan balance and
Social Security in a tax-effective manner. Programs of this nature
may constitute fiduciary advice under the proposed rule, and
recordkeepers could decide to stop offering them.
* RFP responses. Service providers could be viewed as
providing recommendations under the fiduciary rule when
responding to requests for proposals related to plan investments.
Thus, if the proposed rule is finalized, investment providers may
be unwilling to supply the plan with the same amount of data for
fear of becoming a fiduciary.
Assuming that the proposed rule is finalized, many providers
will likely adapt their sales and servicing practices to avoid fiduciary
status. Plan sponsors should expect that the onboarding
process for new plan service providers may be more formal and
involve more written disclosures than the current process does.
However, the DOL could change the proposed rule to allow these
regular services to continue uninterrupted.
If finalized as written-which will almost certainly mean
challenges by litigation-the rule will result in changes in virtually
all corners of the retirement industry. Although the most
drastic effects will be felt by financial institutions, sponsors will
likely see material changes to their service provider relationships,
and they may be asked to, among other things, amend contracts or
their service offerings.
Steve Saxon is a partner in Groom Law Group, Chartered,
and George Sepsakos is a principal in Groom. Offices for
Groom are in Washington.
PLANSPONSOR.COM January - February 2024 39
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