Report Addresses Common BICE Questions

A new report answers some common questions plan sponsors may have about the BICE rule.

As the Department of Labor’s (DOL) fiduciary rule goes through its phased implementation, some financial institutions and advisers will take on new requirements regarding the delivery of investment advice to retirement plan participants and other stakeholders. Some may choose to stop offering investment advice all together.

Built into the rule, however, is the Best-Interest Contract Exemption (BICE). This part of the expanding fiduciary regulations aims to protect plan participants from receiving costly or conflicting investment advice, while allowing service providers and advisers to keep offering retirement plan investment advice under existing compensation structures, as long as they meet certain fairness standards under the Employee Retirement Income Security Act (ERISA). BICE rules are very important for plan sponsors and advisers to consider when interacting with various vendors. 

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An article titled “Everything You Wanted to Know About BICE But Were Afraid to Ask,” was recently published by Benefits Quarterly, a publication of the International Society of Certified Employee Benefit Specialists (ISCEBS). 

Attorneys from Jackson Lewis, who authored the report, suggest plan sponsors begin by asking their retirement plan investment advisers to confirm their status as fiduciaries and to provide proper documentation. The organization also offers some insight into what is expected of a fiduciary working under the BICE. According to the report, a financial institution must “adhere to impartial standards of fiduciary conduct which include providing advice that is in the best interests of the investor and his or her financial objectives without regard to the financial interests of the adviser.” The fiduciary must also “implement policies and procedures designed to prevent violations of fiduciary standards, and adequately disclose fees, compensation and material conflicts of interest with respect to investment recommendations.” 

In an important sense, the ultimate execution of these requirements remains the responsibility of plan sponsors, which is why the report emphasizes that plan sponsors now “need to be more aware of who is being paid and how.” Sponsors have to determine whether all fees for providing financial advice are reasonable.

Plan fiduciaries also have to be on the lookout for potential conflicts of interest. According to the report, a “conflict of interest exists (for purpose of BICE) when an adviser has a financial interest that a reasonable person would conclude could affect the exercise of its best judgement as a fiduciary in rendering advice to a retirement investor.” These conflicts of interest need to be disclosed and proper safeguards must be put in place to protect the participant if the adviser intends to use the BICE protection. A person must be identified by name or function who is responsible for addressing conflicts and monitoring adherence to standards of impartial conduct. Those who “avail themselves of the strictures of BICE” will be allowed to accept varying compensation from third-parties including commissions, 12b-1 fees and revenue-sharing payments.

It’s important to note that BICE is one of several exceptions built into a larger regulatory package, all of which are scheduled to complete their phased implementation period in 2018, although additional delays are possible. 

“Everything You Wanted to Know About BICE But Were Afraid to Ask,” can be found at ifebp.org.

IRS Issues Amendments for Bifurcated DB Distribution

The amendment suggests language a defined benefit sponsor might want to use.

Following its issuance of a final rule on partial annuity distribution options in defined benefit plans (DBs), the Internal Revenue Service (IRS) has just issued model amendments including language that DB sponsors might want to use when offering such options.

To facilitate the payment of benefits partly in the form of an annuity and partly as a single sum, the Department of the Treasury and the IRS amended the regulations to simplify how sponsors would calculate the payments, in order to encourage sponsors to offer participants the additional option of an annuity. Their objective was to protect participants with an annuity in the event of unexpected longevity. The participant can decide to divide his benefit into two or more portions, and the IRS offers sponsors two methods to compute how the benefits would be distributed.

In addition, for pre-approved plans, some portions of the model amendment may be included in the basic plan document and others may be included in the adoption agreement.

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However, the IRS is also allowing plan sponsors to limit how the bifurcation is handled. For example, sponsors may limit bifurcation to only two forms. They could also set certain percentage parameters, such as 50/50 or 75/25. Sponsors could also limit bifurcation for the portion of an accrued benefit earned before a specific date and the portion earned after that date.

The IRS’s notice on model amendments to add bifurcated distribution options to DB plans can be downloaded here.

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