DOL Releases Two Batches of Fiduciary-Rule FAQs
January 17, 2017 by Melanie Waddell
The U.S. Labor Department has issued back-to-back guidance, in the form of frequently asked questions, for advisors, investors and workers regarding the agency’s fiduciary rule, which takes effect on April 10.
The Labor Department on Friday 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.
The department at the same time released a 16-page FAQ, which includes 30 questions and answers. Phyllis Borzi, assistant secretary of Labor for the Employee Benefits Security Administration, said the FAQ is 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 latest 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, said 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.”
Reish said Question 3 “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.”
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.
As to the FAQ released specifically for investors and workers, Joshua Waldbeser, of counsel at Drinker Biddle, 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.
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.”
Originally published by ALM affiliate ThinkAdvisor.com. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
