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AdvisorNews - August 2017

New Department of Labor “Fiduciary” Rule Goes Into Effect


Susan A. Wetzel , Chris M. Kang

After several delays, the Department of Labor’s (the “DOL’s”) final “fiduciary” rule expanding the definition of who is an investment advice fiduciary became effective on June 9, 2017. The final rule significantly expands the concept of “investment advice” for purposes of determining fiduciary status under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and the Internal Revenue Code of 1986, as amended (the “Code”). The final rule originally was to go into effect on April 10, 2017. However, on February 3, 2017, President Trump signed a Presidential Memorandum directing the DOL to reexamine the final rule, upon which, if certain findings were met, the DOL was instructed to publish for notice and comment a proposed rule rescinding or revising the final rule, as appropriate. The DOL then delayed the effective date of the final regulation until June 9, 2017. While many hoped the final rule would be delayed further, the Secretary of Labor recently announced that while he is concerned that the new fiduciary rule is not consistent with President Trump’s deregulatory goals, the DOL did not have the authority to further delay the rule. The Secretary of Labor has stated that the DOL will continue to study the final rule, and may propose further changes.


Private Investment Funds

The offering and marketing of interests in private investment funds to ERISA-covered plans and “plan asset” entities (“ERISA Plans”) and individual retirement accounts (“IRAs,” together with ERISA Plans, referred to herein as “Benefit Plan Investors”), may raise issues under the final rule. Although most fund documents expressly provide that no recommendations or investment advice is being provided to prospective investors in connection with their investment in the fund, it is possible that certain statements in the fund documents or communications in the marketing efforts (or later discussions with investors) could be construed as “recommendations” (and therefore, fiduciary advice) under the final rule. The term “recommendation” is very broad and encompasses any form of communication which a reasonable person could view as recommending how that person should act with respect to an investment. Thus, the manager of a fund may become a fiduciary of its investors if there is a recommendation with respect to the purchase of, continued holding of, or disposition of interests in a fund, unless a carve-out applies. The final rule provides a carve-out (sometimes called the “seller’s carve-out” or “sophisticated plan exception”), which if applicable, would exempt managers from becoming a fiduciary in connection with any recommendations made by such managers. Many Benefit Plan Investors will likely satisfy the requirements for one of the carve-outs.


Carve-out from Fiduciary Status

The DOL recognized that not all recommendations should be construed as “investment advice,” and understood that some Benefit Plan Investors are either sufficiently sophisticated or are advised by sophisticated professionals so as to understand that parties that have an interest in selling a product are not fiduciaries of such Benefit Plan Investors in connection with any recommendations in making a sale. The final rule provides a carve-out if the responsible fiduciary making the investment decision on behalf of a Benefit Plan Investor subscribing for an interest in the fund (or making a decision with respect to an existing investment) is an independent fiduciary that is either:

  • a bank (as defined in section 202 of the Investment Advisers Act of 1940, as amended (the “Advisers Act”) or similar institution that is regulated and supervised and subject to periodic examination by a State or Federal agency;
  • an insurance carrier that is qualified under the laws of more than one state to perform the services of managing, acquiring or disposing of assets of a plan;
  • an investment adviser under the Advisers Act or the laws of the State in which it maintains its principal office and place of business;
  • a broker-dealer registered under the Securities Exchange Act of 1934, as amended; or
  • an independent fiduciary that holds, or has under management or control, total assets of at least $50 million.

In order for a fund manager to rely on this carve-out, the fund manager should know or reasonably believe (and should receive representations) that the Benefit Plan Investor’s fiduciary is (i) capable of evaluating investment risks independently, both in general and with regard to the fund’s investment program and strategies; (ii) independent of the fund, the fund manager and their affiliates and there does not exist any financial interest, ownership interest or other relationship that would limit the fiduciary’s responsibility to the Benefit Plan Investor; and (iii) acting as a fiduciary with respect to the investment transaction and is exercising independent judgment in evaluating such transaction.

The fund manager must also: (i) inform the Benefit Plan Investor that it is not undertaking to provide impartial investment advice, or to give advice in a fiduciary capacity, in connection with the investment in the fund; (ii) inform the Benefit Plan Investor of the existence and nature of its financial interests in the transaction (which should be provided in the fund documents); and (iii) not receive a fee, directly or indirectly, for the provision of investment advice to the Benefit Plan Investor in connection with the transaction (note, this does not include management fees or other incentive compensation payable by the fund).


Next Steps

To the extent not already updated, fund managers should consider amending their subscription documents (or adding a supplement) to incorporate the carve-out concepts described above with respect to new (or additional) investments in their funds. With respect to existing Benefit Plan Investors, fund managers may consider sending out a notice or supplement to such investors to obtain the appropriate representations for reliance on a carve-out. Alternatively, under certain circumstances, for investments made prior to June 9, 2017, a grandfathering rule may apply with respect to such existing investments.  Note, for self-directed ERISA Plans and IRAs whose owners are not represented by a sophisticated independent fiduciary, any recommendations to such investors will not fall into one of the carve-out categories. Thus, fund managers may want to suspend taking investments (or additional investments) from such investors until further guidance is issued.


Fund managers should also evaluate the way and manner in which interests in their funds are marketed and sold, to minimize making any “recommendations,” and if made, to make sure that the carve-out conditions are satisfied. Depending on the platforms used, additional agreements with sales agents, placement agents, investment banks, or broker-dealers, as applicable, may be needed to ensure compliance with the carve-out conditions.



Last Minute Fiduciary Rule Check-In: What Independent RIA Firms Should Do Now

By Fred Reish, Joan M. Neri and Joshua J. Waldbeser

The June 9, 2017, applicability date of the Department of Labor (DOL) Fiduciary Rule (Rule) is almost here. The DOL’s new and amended prohibited transaction exemptions (PTEs) will also be applicable on that date. While the requirements of some PTEs are relaxed during the “transition period” from June 9 through December 31, 2017, there are important obligations that apply. Our previous Alert discusses these issues more broadly.

Some of the more onerous aspects of the Rule and PTEs will not apply to independent RIAs (more on why later). By “independent” RIA firms, we mean those with no broker-dealer affiliate, who also do not manage proprietary funds. But, there are some important considerations that apply to independent RIA firms when their investment adviser representatives give advice to plan and IRA clients on and after June 9. Below we summarize three of the most important ones, with more specific thoughts to follow.

  • First, recommendations to take distributions from employer-sponsored retirement plans, and to roll them over to IRAs, will be fiduciary advice. Because these recommendations will usually cause RIAs to receive additional compensation (even if the IRA will be a level fee account), RIAs will need to rely on the “transition” Best Interest Contract Exemption (Transition BICE).
  • Second, recommending that an IRA at another institution be transferred to the firm will be fiduciary advice. Again, the limited requirements of Transition BICE will need to be satisfied.
  • Third, where the RIA charges different fees for different asset classes (e.g., equities vs. fixed income), recommending an asset allocation to a plan or IRA will influence the RIA’s compensation and, therefore, will result in a prohibited transaction. The RIA can either rely on Transition BICE as to the asset allocation recommendations (as long as the asset allocation advice is non-discretionary), or charge a level “blended” asset management fee to avoid a prohibited transaction in the first place.

Limited Impact on Independent RIAs

The Rule significantly expands the definition of what constitutes “fiduciary” investment advice. Under the regulations in effect before June 9, the advice must be individualized for the client, provided on a regular basis, and with the mutual understanding that it would serve as a “primary basis” for investment decisions. On and after June 9, these requirements no longer apply.

Many independent RIA firms were already fiduciaries under the previous definition, and in the case of ERISA plan clients, have acknowledged their fiduciary status in writing as part of their 408(b)(2) disclosures. And, because the DOL’s “best interest” standard is essentially the same as ERISA’s fiduciary standard, the Rule and PTEs do not significantly change the fundamental requirements that apply to independent RIA firms when advising plans and their participants.

IRAs are not subject to the ERISA rules, including the ERISA fiduciary standard and the 408(b)(2) disclosure requirements. While the DOL does not have jurisdiction over IRA advice generally, it has the authority to issue PTEs that apply to ERISA plans and IRAs alike. The DOL’s Impartial Conduct Standards (i.e., best interest standard, reasonable compensation, no misleading statements) are conditions of the PTEs (not the Rule itself) and apply only if the RIA needs to rely on the PTE. If, for example, the RIA is providing ongoing advice to an IRA for only a level fee, there is no prohibited transaction and the Impartial Conduct Standards do not apply. However, there are some advice activities that will result in a prohibited transaction requiring reliance on a PTE, as discussed below.

Plan-to-IRA Rollovers

On and after June 9, recommendations to take a distribution from a plan and roll it over to an IRA advised by the RIA will be fiduciary advice, as will advice about how the IRA should be invested. This advice will usually result in a prohibited transaction because the RIA will receive additional compensation – i.e., where the RIA provides services for a fee to the IRA but not the plan, or where it provides services to both but the IRA fee is higher (of course, one exception would be where the RIA gives advice on plan and IRA assets for the same fee). This “one time” conflict requires reliance on a PTE – namely, Transition BICE.

Under the BIC Exemption, a simplified approach known as “BICE Lite” is available where the only conflict is the rollover recommendation, and the IRA account is advised or managed for a level fee. During the transition period, the only requirements of the BIC Exemption, including BICE Lite, are the Impartial Conduct Standards. To satisfy these requirements, the RIA will need to consider all relevant factors, including the investments available under the existing plan and the proposed IRA, the different levels of services, and the fees and expenses associated with both the existing plan and the IRA, including whether the employer pays for some of the plan’s expenses. Other factors that differ as between plans and IRAs may be relevant as well, including certain tax rules, distribution options, loan availability and creditor protections.

Although not required until January 1, 2018, we recommend that RIAs follow the basic process required under BICE Lite to document why the rollover is in the investor’s best interest. Firms should consider developing written materials to assist IARs in making these determinations, and maintaining that documentation.

IRA-to-IRA Transfers

Recommendations to transfer an existing IRA from another institution will also constitute advice and require reliance on Transition BICE if it results in additional compensation to the RIA. The process for establishing why the transfer was in the client’s best interest will be similar to the process used for plan-to-IRA rollovers. But, some of the factors (e.g., disparate tax rules, who pays expenses) will not apply to a comparison between two IRAs.

Asset Allocation Recommendations for Managed Assets

Under the Rule, an RIA can recommend its own asset management services, and this is treated as a non-fiduciary “hire me” recommendation. On the other hand, a recommendation on asset allocation or strategy is advice. If the RIA charges different management fees for different investment strategies or asset classes, then the receipt of the fees will result in prohibited compensation unless a PTE is used.

If the RIA merely recommends the strategy and the client makes the ultimate investment decision (i.e., the advice is non-discretionary), then the RIA can use Transition BICE. Transition BICE is not available if the RIA has discretion to determine the investment strategy. Using BICE, the RIA will need to make sure the asset allocation recommendation satisfies the Impartial Conduct Standards. RIAs should document the reasons why the investment strategy was in the best interest of the particular client in view of the client’s financial needs, risk tolerance and investment objectives. It is also advisable for the RIA to have a third party benchmarking service compare the RIA’s fees with the fees of other advisers who provide comparable services.

A second option is for the RIA to “levelize” their management fee across the various asset classes by charging a blended fee. This will avoid a prohibited transaction entirely. This second approach is a viable option for RIAs who cannot use BICE because they have discretion over the selection of the investment strategy. For advice to ERISA plans and plan participants, ERISA’s fiduciary standards will still apply. For IRAs, the DOL’s Impartial Conduct Standards will not apply, since the RIA will not need to rely on a PTE. However, the RIA will still be subject to the fiduciary obligations under the Advisers Act.

While the Rule and PTEs have only limited applicability to independent RIAs, there is potential exposure for some recommendations. Independent RIAs should make sure they have appropriate procedures in place to safeguard compliance with the Rule and PTEs. While the only requirements imposed under Transition BICE are the Impartial Conduct Standards, after the transition period ends, further steps to manage conflicts of interest will be required, including with respect to compensation incentives for individual IARs.


The disclosure 401(k) advisers may be missing under the DOL fiduciary rule

The regulation will trigger a fiduciary acknowledgement from advisers. But, strangely, it's not a disclosure mandated by the rule itself


Jun 8, 2017 @ 5:24 pm

By Greg Iacurci

When the Department of Labor's fiduciary rule kicks in June 9, previously non-fiduciary advisers to 401(k) plans will need to furnish important new disclosures to their clients acknowledging their newly minted fiduciary status.

The kicker: The action isn't mandated by the fiduciary rule itself, but another retirement rule already on the books. And failure to provide the disclosures could lead to some nasty repercussions for advisers and broker-dealers.

Bruce Ashton, a partner at Drinker Biddle & Reath, said the disclosures are a "big deal."

"They're all of a sudden now saying, 'Plan sponsor, plan fiduciaries, I'm also a fiduciary and that subjects me to some different standards,'" Mr. Ashton said.


The provision in question is called 408(b)(2), a section of the Employee Retirement Income Security Act of 1974 that allows advisers, broker-dealers and other service providers to receive compensation, directly or indirectly, from a 401(k) plan under certain conditions.

A regulation in 2012 updated 408(b)(2) to mandate certain written disclosures from these service providers. The providers have to describe their services, compensation and "status" as a fiduciary to 401k) clients. These are onetime notifications, unless there's a change in the original information.

Between 2012 and the present day, brokers and other non-fiduciary providers to ERISA retirement plans largely didn't disclose they were fiduciaries, observers said.

"[Broker-dealers] either would say, 'By the way we're not a fiduciary, or they wouldn't say anything about fiduciary status," Mr. Ashton said.

However, the DOL fiduciary rule, which raises investment-advice standards in retirement accounts, triggers a massive change. Come June 9, tens of thousands of retirement plan advisers will take on fiduciary status with their clients for the first time, thereby triggering a change in "status" and therefore new disclosures.

"That's one thing that could very easily be overlooked," said Duane Thompson, senior policy analyst at fi360 Inc., a fiduciary consulting firm.

To give a sense of the scope, there are approximately 250,000 active, licensed financial advisers who either work on or get paid from a defined contribution plan, according to The Retirement Advisor University. Around 225,000 of those are "dabblers" who oversee less than five DC plans — these advisers are often non-fiduciaries.


Because 408(b)(2) only applies to plan advisers, they represent the only adviser group that will need to furnish written acknowledgement of fiduciary status come June. As currently written, the fiduciary rule only makes this a necessity for other advisers, such as those working with IRAs, in January, when the full force of the rule kicks in.

The fiduciary disclosure creates "an interesting problem," said Jeffrey Lieberman, executive compensation and benefits counsel at Skadden, Arps, Slate, Meagher & Flom.

"There's at least some evidence when someone goes to sue you that you are a fiduciary," Mr. Lieberman said.


The broker-dealers and advisers affected must, unless there are extraordinary circumstances, provide updated disclosures to plan fiduciaries within 60 days "from the date on which the covered service provider is informed of such a change [in status]."

However, this guidance is vague, as Fred Reish, partner at Drinker Biddle & Reath, notes in a recent blog. It could mean 60 days from the day it was determined the fiduciary rule would become applicable June 9; 60 days from June 9 itself; or from the first day an adviser makes an investment recommendation post-June 9, he said.

Mr. Reish therefore recommends a conservative position, and that the notice be sent in June.




Shifting DCIO distribution offers opportunity for 401(k) advisers

Some asset managers traditionally focused on selling through advisers are bypassing them to go directly to 401(k) plan sponsors

Jul 19, 2017 @ 12:16 pm

By Fred Barstein


In the large defined-contribution-plan market — the realm of plans larger than $1 billion — the norm is for money managers to sell directly to plan sponsors and work cooperatively with the plan's consultants. For smaller plans, the defined contribution investment-only (DCIO) groups at these asset managers have generally sold only through advisers.


But that's about to change.


Traditionally, money managers have had three distribution strategies for the defined contribution market, varying by plan size:

  • $1 billion-plus: direct and through consultants
  • $250 million to $1 billion: through advisers and consultants
  • Under $250 million: through advisers


But times are changing. Consultants are moving down market, advisers are moving up market, and "tier-two" consultants are emerging. (Tier-two consultants have large books of DC business, but don't have the footprint of the biggest national firms such as Towers Watson or Mercer.) Advisers and consultants are also trying to sell their own proprietary asset management products as a hedge against declining advisory fees. The growth of professionally managed investments like target-date funds have added another entity against which DCIOs must sell.


There are almost 50 DCIO shops calling on the same 2,500 elite plan advisers, those with more than $250 million in assets under management and 10 DC plans under their purview.

On the other hand, there are over 2,600 DC plans with $250 million to $1 billion and almost 4,000 plans with $100 million to $250 million. Selling direct to plan sponsors almost triples the market opportunity for DCIO firms scrambling for assets and looking to leverage their brand, people and intellectual capital.


DCIOs need and want to be able to tell their story directly. There's a parallel here to pharmaceutical companies, which advertise prescription drugs to consumers.

First-movers will have an advantage. While I'm not at liberty to name names, a few DCIO firms that have a rich history of selling direct have already started, and another firm, which has gathered tens of billions of assets in the high-net worth market by going direct, is ready to enter the DC market.


Should advisers be concerned?


Record-keeping firms that sell direct to plan sponsors clearly present a threat to plan advisers, because the adviser never enters the relationship. That is why very few providers focused on the $1 million-$250 million market maintain a purely direct-sold model. With almost 90% of these DC plans using an adviser, the reasons to work with them are compelling.

Most adviser-sold record keepers that have proprietary funds on their platform have created a separate DCIO group to focus on selling investments through advisers to avoid potential conflicts.


But, in truth, direct-sold DCIOs are not looking to cut out advisers. That's not just to retain good relations with them, but also because they have no incentive. More plan advisers are moving to a fee-based model whereby advisers are paid directly by the plan sponsor or out of plan assets, not commissions. So there's no additional cost, either real or apparent, for DCIOs to sell through advisers, if they don't have to pay out those commissions. And most smaller plan sponsors do not have the staff or expertise to select and monitor their investments as a prudent expert, as is required by law.


Because DCIOs focus on elite plan advisers, they may find opportunities they can pass on to those experienced advisers when calling directly on plans that use inexperienced advisers or may be looking for a new one. Many plans struggle to find a new adviser or even conduct due diligence on them, and DCIOs may be able to fill that gap.

So, like it or not, times are changing, and elite advisers that have good relationships with their DCIO partners stand to benefit.



4 Reasons For 401k Advisors to Partner with TPAs

They're experts in ensuring plans are in compliance with rules and regulations


401k advisors and TPAs make for a natural fit.

Posted By: Sheree Tallerman August 2, 2017

Innovation begins within, but certainly, those with whom we surround ourselves with influence our ideas, confidence, and ability to grow and succeed.


As a 401k plan advisor, it’s easy to get caught up in the numbers and lose focus of the broader scope of how a retirement plan could be structured for maximum benefit, not only for the client, but the advisor as well. Third party administrators (TPAs) are experts in ensuring plans are in compliance with IRS rules and regulations and are designed for optimal tax deductions and savings.


TPAs also help bolster your firm by providing your client confidence and allow you to manage more. Here are four of many reasons why a TPA relationship is beneficial to your firm and your clients.  


  1. Protect Your Assets

It’s simple to see the outcome of an account not doing well financially: you’ll likely lose the client, or at least sour the relationship. Nevertheless, what happens if the client, whom you manage, gets fined or is paying fees they shouldn’t have to? Well, you might not only lose the client, but you could be sued for lack of oversight.

Hiring a TPA helps alleviates this risk.  


The TPA manages the ever-changing rules and regulations of the Internal Revenue Service (IRS), Department of Labor (DOL) and in the case of defined benefit pension plans, the Pension Benefit Guarantee Corporation (PBGC). This allows you to focus on managing Plan assets. Working with a good TPA should ensure that you, the investment advisor, can focus on what matters to you – the investments.


  1. Manage More Assets With Brilliant Plan Design

Plan design can make a world of difference for certain clients. It can save them money through significant tax deductions and allow some of their highly compensated employees—usually the decision makers—to save even more through their retirement plans.


This means that you’re able to manage more money, and improve your client’s satisfaction. While losing one client might not feel like much of a hit at the time, in the long run increasing retention and managing more has a significant impact on your success and your firm’s results.  


Through using precise calculations and complex compliance testing, a TPA is able to be your guiding light through plan design to ensure that the plan constructed specifically to meet the needs of the company.  No prototypes or “out of the box” options – plans are customized to achieve exactly what your client is looking for – maximum tax deductions and increased wealth.

This can easily distinguish you as an expert in this field. Lastly, TPA firms run annual compliance testing for your client, requesting participant information including compensation, so you know that you have annual contact with the client.  This allows you to focus on the area you excel in – asset management.       


  1. Grow Your Firm

Working with a TPA should be a mutually beneficial relationship. As we know, the financial industry is still largely referral based and reputation matters a lot. Having a TPA sit at the table with you improves your ability to gain new prospects, seal the deal with potential clients, and manage existing relationships. TPAs can begin to funnel new business to you through tapping into their existing network. Beyond, this relationship can easily be fruitful for bolstering your reputation as a firm as experts both in wealth management (after-tax) and retirement plan (pre-tax) assets.   

With a TPA on your side, you’re able to showcase your authority and prove to your clients that you have the ability to manage them as they grow. Showing you’re an authority expert and answering ongoing client questions about tax deduction opportunities and plan management showcases your ability to grow with them. This prevents you from being outgrown by your client and allows you to increase retention and manage more funds.


  1. Have Complete Information and Create Stickiness Among Clients

Often wealth managers (those who manage after-tax money) shy around the question of retirement plans, largely due to stepping into the world of ERISA without full knowledge. This missing conversation leaves a great deal of money on the table.  Imagine if you, as the investment advisor, could take the leading role as the wealth manager and the retirement plan advisor.  


It creates stickiness among clients because they’re more ingrained in your day-to-day and you’re able to provide valuable insight from start to finish for them without them having to hop back and forth between different advisors. It’s not an easy task, especially since you are entering the world of ERISA, but it’s a task that a TPA undoubtedly can help you achieve.

With a TPA, you’re able to have conversations confidently about the client’s retirement future without being shy about this [very important] subject. It also takes the emphasis off an advisors “commoditization” and focuses more on their tax needs.


Find A TPA

TPAs come in all shapes and sizes with a variety of specialities and strengths. Finding the right TPA firm for you and your client will likely takes time so it’s important not to rush the process. Ensure that the chosen TPA is one whom you want to work with regularly and you want to represent you in front of your client.


Beyond that, don’t become reliant on one TPA. Every client will have specific needs and it’s best to consider finding the best fit for each and every client. This broadens your network, while also proving to the client you have their best interest in mind.