United States: The DOL's Fiduciary Rule: An Update And Practical Advice

Last Updated: December 6 2017
Article by Lowell Walters

This updates our August 15 blog entry, which targeted employers who sponsor retirement or welfare plans and are concerned about their fiduciary liabilities for properly selecting service providers. On November 27, the Department of Labor (DOL) announced that portions of the "Fiduciary Rule" that would govern certain service providers will be delayed from January 1, 2018 to July 1, 2019, while the DOL examines President Trump's concerns that the Fiduciary Rule might hinder participant access to financial information and advice.

Plan Sponsors Should Not Adjust Their Actions Based on the Fiduciary Rule and This Delay.

At least, plan sponsors should not make adjustments if they are currently using prudent practices. The DOL intended its Fiduciary Rule to help employers select the right investment advisor for their plans, but it does not replace the obligation to use prudent judgement in selecting an advisor or investment provider. Employers should continue to fulfill their responsibilities by conducting due diligence on all service providers engaged to ensure they are appropriate. Equally important, employers that have never used a prudent practice to select their current providers should review and reassess whether a change is appropriate.

A Simple Way to Assess Whether Your Hiring Practice Was Prudent.

A grossly oversimplified analysis that can still be incredibly useful is for an employer to judge its own selection of service providers based on the level of responsibility they take for performing their services. Did the employer hire service providers that are not responsible for their own errors? Specifically, if they make decisions, do they accept responsibility for wrong decisions? If they make recommendations, do they take responsibility for those recommendations? If they provide services, do they accept responsibility for performing those services incorrectly? The easiest way to answer these questions is to review the indemnification provisions in service contracts. Many contracts say a provider is not liable unless it is "intentionally negligent." Would you hire someone with the understanding that they are not responsible for doing a poor job unless they did so intentionally? Unless you objected to this provision and had it changed in the contract, you may have agreed to exactly that!

Prudent Assessment Reminders From the Fiduciary Rule.

Under the Fiduciary Rule's current itineration, advisors that advise participants may charge no more than reasonable compensation for those services, must make no misleading statements, and must prioritize the participants' best interests when offering that advice. This is an excellent reminder of items that should be the plan sponsor's priorities. How can the plan sponsor be comfortable that the compensation charged to the plan is reasonable? The easiest way is to assess what similar service providers are charging. How can the plan sponsor know that the service provider's priority is the plan's and plan participant's interests? An old saying notes that if you want to gauge where someone's interests lie, follow the money! Ask how the service provider is compensated. To the extent compensation comes from sources other than the plan sponsor and the plan, ask how you can be comfortable that the interests of that third party do not affect the provider's advice, recommendations, or services. For example, if an investment advisor is partially paid by the investment provider, does that give that advisor a financial incentive to use or recommend that particular investment provider? Ask the questions, note the responses, and act accordingly.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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