(b)lines Ask the Experts – How Does the DOL Fiduciary Rule Impact 403(b)s?

“I realize that all these emails probably means that the new rule is important, but I don’t have time to sort through them all. As an Employee Retirement Income Security Act (ERISA) retirement plan sponsor, can the Experts give me the “Cliffs notes” on the new rule and how it affects me? 

Michael A. Webb, vice president, Cammack Retirement Group, and David Levine, with Groom Law Group, answer: 

Certainly! The Experts feel your pain—and they apologize if they’ve taken part in the clogging of your mailbox!

The final fiduciary rule, which was issued to much fanfare on April 6, is NOT primarily directed at plan sponsors, but at those firms and individuals who provide advisory services, investment products, and other investment-related services to retirement plan sponsors and their participants, IRAs and their owners. The “Cliffs notes” on the new rule, as you refer to them, are the following—with a key point being that a lot these rules have conditions and requirements, so few things are just a “free pass”:

1)      The rule redefines the term “fiduciary” as it applies to “investment advice” from advisers and retirement service providers. As a result, many service providers, particularly those who service participants, will become fiduciaries for either the first time or with respect to more of their activities. Under the old rules, some advisers (and service providers) were not subject to the fiduciary duties imposed by ERISA, the law governing retirement plans, or similar rules applicable to IRAs. Under the final rule, any individual receiving compensation for making investment recommendations that are individualized or specifically directed to a particular plan sponsor or fiduciary running a retirement plan (e.g., an employer with a retirement plan), plan participant, or IRA owner for consideration in making a retirement investment decision could be a fiduciary subject to the new rules (unless they satisfy certain exceptions from the rules).

2)      Many of the educational activities we currently have today will still be permitted, so that plan fiduciaries, sponsors and the entities who work with them will not risk becoming subject to the new fiduciary standard for advisers merely due to the fact that such education is provided. There was some concern that certain types of education that had previously been permitted—naming specific investment options in asset allocation models, for example—would no  longer be permitted, but the final rule dropped such restrictions for plans (but not IRAs)—but there are certain requirements that apply.

As for its effect on retirement plan fiduciaries and sponsors, there will be little direct effect, but those who advise retirement plan participants, and the firms who employ such individuals, are likely to be affected. Further, if you deal with more complex investments (if you are a larger plan), some of your investment structures could be impacted. For example, if your recordkeeper employs individuals who provide advisory services to participants, those recordkeepers could be affected. It should be further noted that there are several provisions of the rules of direct relevance to plan sponsors:

1)      403(b) plans that are not subject to ERISA (i.e. governmental plans, church plans, and elective deferral-only plans utilizing the 29 CFR 2510.3-2(f) safe harbor) are not subject to the final fiduciary rule at all.  However, rollover IRAs from these plans could be caught in these rules.

2)      Recommendations to independent fiduciaries (and independence is explained in the rule) of plan sponsors managing more than $50 million dollars in assets will not be considered to be investment advice subject to the final fiduciary rule

3)      Employees of the plan sponsor will not become fiduciaries solely due to the fact that they provide advice to a plan fiduciary or an employee if the person receives no fee or other compensation in connection with the advice beyond the employee’s normal compensation for work performed for the employer.

The Experts could write a long article but we’ll leave it at here for now. Thank you for your question!

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.