DOL Issues FAQs Clarifying Required Fiduciary Status Disclosures under ERISA Section 408(b)(2) During Fiduciary Investment Advice Rule Transition Period

Practical Law Legal Update w-009-6807 (Approx. 8 pages)

DOL Issues FAQs Clarifying Required Fiduciary Status Disclosures under ERISA Section 408(b)(2) During Fiduciary Investment Advice Rule Transition Period

by Practical Law Employee Benefits & Executive Compensation

Background

On April 6, 2016 the DOL issued a final rule that replaces the existing regulatory interpretation of fiduciary investment advice under Section 3(21)(A)(ii) of ERISA (29 U.S.C. § 1002(21)(A)(ii)) (fiduciary rule). The fiduciary rule broadens the types of advice that constitute fiduciary investment advice under ERISA, resulting in additional service providers becoming investment advice fiduciaries. In connection with the fiduciary rule, the DOL also issued several new prohibited transaction exemptions (PTEs) and amendments to existing PTEs currently used throughout the financial industry for certain investments made by ERISA plans.

In April 2017, the DOL announced that the applicability dates for the fiduciary rule and related prohibited transaction exemptions would be delayed from April 10, 2017 to June 9, 2017 (see Legal Update, DOL Issues Final Rule Delaying Applicability Date of Fiduciary Rule and Related Prohibited Transaction Exemptions). That guidance further delayed compliance with the remaining conditions in these exemptions, such as the requirements to execute the best interest contract and make specific written disclosures and representations of fiduciary compliance in communications with investors, until January 1, 2018.

For more information on the fiduciary rule, see Practice Note, Definition of Fiduciary Investment Advice and Fiduciary Investment Advice Toolkit.

Fiduciary Status Disclosure

Under ERISA Section 408(b)(2) and the implementing regulations, service contracts must be reasonable and service providers cannot receive more than reasonable compensation for their services (29 U.S.C. § 1108(b)(2); 29 C.F.R. § 2550.408b-2). To ensure that plan fiduciaries have enough information to determine if service contracts are reasonable, the regulations require that service providers disclose information regarding their services and expected compensation, including whether the services will be provided in a fiduciary capacity (29 C.F.R. § 2550.408b-2(c) and see Practice Note, Service Provider Disclosure Requirements for Pension Plans).

The FAQs first address whether service providers who are providing fiduciary investment advice due to the fiduciary rule must update their Code Section 408(b)(2) disclosures to disclose their status as fiduciaries. Under the current ERISA Section 408(b)(2) regulations, if a service provider reasonably expects that it, an affiliate, or a subcontractor will provide services in a fiduciary capacity, the service provider must disclose that to the plan fiduciary. The FAQs provide that no additional disclosure is required if:

After the fiduciary rule, the service provider continues to provide services in a non-fiduciary capacity (see Non-Fiduciary Service Providers).
The service provider has already effectively disclosed its fiduciary status.

The FAQs also address when fiduciary service providers are required to disclose their status as fiduciaries during the transition period currently in effect under the fiduciary rule (see Fiduciary Service Providers).

Non-Fiduciary Service Providers

Non-fiduciary service providers who do not reasonably expect to provide fiduciary investment advice are not required to disclose investment advice fiduciary status under the ERISA Section 408(b)(2) regulations. The FAQs specifically clarify that no disclosure is required even if a service provider's individual employees, agents or representatives (such as call center employees) engage in unauthorized and irregular communications that exceed stated limitations in the service provider contract that constitute investment recommendations under the fiduciary rule.

Fiduciary Service Providers

Use of the Term "Fiduciary" in Disclosures

To satisfy ERISA Section 408(b)(2), a fiduciary service provider generally must specify that it will be acting "as a fiduciary" (29 C.F.R. § 2550.408b-2(c)(1)(iv)(B)). However, some affected service providers have expressed concern about potential confusion resulting from a newly required express statement on fiduciary status during the fiduciary rule transition period, given that:

The best interest (contract exemption BICE) and principal transaction exemption do not require the disclosure of fiduciary status until January 1, 2018.
Possible changes may be made to the fiduciary rule (see Legal Updates, President Trump Issues Memorandum Directing DOL to Review Fiduciary Investment Advice Regulation and Financial CHOICE Act Passes House Financial Services Committee).

Due to these concerns, the DOL stated that it would not treat the failure to use the term "fiduciary" as a violation of the ERISA Section 408(b)(2) disclosure requirement until the transition period expires on January 1, 2018. Instead, the DOL indicated it would treat fiduciary service providers as meeting the ERISA Section 408(b)(2) disclosure requirements provided they:

Give an accurate and complete description of the services that will be provided to the plan, including the services that would make the covered service provider an investment advice fiduciary under the fiduciary rule.
Make any other required disclosures under ERISA Section 408(b)(2) (see Practice Note, Service Provider Disclosure Requirements for Pension Plans: Information Required to be Disclosed).

The FAQs recognize that many financial institutions and service providers have already communicated with their ERISA plan customers about changes made to their services under the fiduciary rule and expects that many of these communications are sufficient to satisfy the ERISA Section 408(b)(2) disclosure requirements. However, the FAQs expressly provide that these disclosure requirements would not be considered satisfied if a service provider contract expressly states that the provider is not a fiduciary or is not providing fiduciary services, and that provider provides or reasonably expects to provide fiduciary investment advice under the fiduciary rule. In this instance, a revised contract or disclosure must be provided to the ERISA plan customer that removes or affirmatively corrects the misleading statement.

Timing of Change in Fiduciary Status Disclosures

Under the ERISA Section 408(b)(2) regulations, a service provider must disclose a change in fiduciary status as soon as practicable, but no later than 60 days from the date the service provider is informed of the change, unless circumstances beyond the service provider's control prevent it from doing so (29 C.F.R. § 2550.408b-2(c)(1)(v)(B)). If circumstances beyond the service provider's control prevent it from making a timely disclosure, it must make the required disclosure as soon as practicable.

According to the DOL, a service provider affected by the fiduciary rule would not have been "informed" of the change in fiduciary status until June 9, 2017, the fiduciary rule's current applicability date. The DOL also found the 60-day disclosure period to be impractical, given the broad range of service providers potentially affected by the fiduciary rule and the uncertainty regarding a decision to delay the applicability date. Therefore, the DOL stated it would treat service providers who disclose a change in fiduciary status as soon as practicable after the fiduciary rule's applicability date as having satisfied the disclosure requirement, even if the disclosure is made more than 60 days after June 9, 2017.

Electronic Delivery of Disclosures

A service provider may make the required disclosures electronically provided that the:

Disclosures are readily accessible to the plan fiduciary.
Plan fiduciary receives clear instructions on how to access the information.

(29 C.F.R. § 2550.408b-2 and see Practice Note, DOL Safe Harbor for Electronic Disclosure of Plan Information.)

Recommendations to Contribute to a Plan or IRA

The FAQs also address whether recommendations that plan participants contribute to a plan or IRA qualify as fiduciary investment advice under the fiduciary rule. In the DOL's view, these types of recommendations do not qualify as fiduciary investment advice under the fiduciary rule so long as they do not include recommendations on specific investment products or managing particular investment property.

The FAQs provide examples of communications that would not be considered fiduciary investment advice, including:

A plan enrollment brochure stating that participants should consider saving a certain percentage of their pay.
A targeted email suggesting that a participant increase his or her contributions by a certain percentage to reach a specific savings goal.
A targeted email sent during a participant's birth month suggesting that a participant contribute a certain amount based on the amount that the participant has already saved in the plan.
A telephone call from a call-center employee suggesting that a participant aim for a specific overall retirement savings goal (such as 15% of pay, considering employee contributions and employer matching contributions) and recommending a specific increase in the percentage of pay the participant currently contributes.

Recommendations to Fiduciaries on Increasing Plan Participation and Contribution Rates

According to the FAQs, recommendations given to a plan fiduciary regarding methods to increase participation in, or contribution rates to, a plan also do not constitute investment advice under the fiduciary rule, provided they do not include recommendations on specific investment products or managing particular investment property. The FAQs clarify that these recommendations would not constitute fiduciary investment advice even when the recommendation is based on specific attributes of the plan or its demographics (such as correlations between participation or contribution rates and specific participant attributes).

Practical Implications

These FAQs are helpful to plan fiduciaries and service providers of ERISA-governed retirement plans who were uncertain of the interaction between the fiduciary disclosure requirements under ERISA Section 408(b)(2) and the transition relief issued under the fiduciary rule. Plan fiduciaries should review their service provider contracts and any disclosures provided by their service providers regarding fiduciary status to ensure that they satisfy the requirements of the regulations and these FAQs. In particular, if a plan fiduciary maintains a contract with a service provider that affirmatively states that the provider is not a fiduciary, the plan fiduciary should carefully consider whether the provider may be considered a fiduciary under the fiduciary rule such that additional disclosures or a revised contract is required.

For more information on the fiduciary rule, see Fiduciary Investment Advice Toolkit. For resources addressing ERISA Section 408(b)(2) obligations and related contracts, see Practice Notes, Service Provider Disclosure Requirements for Pension Plans and Negotiating ERISA Service Provider Agreements.

DOL Issues FAQs Clarifying Required Fiduciary Status Disclosures under ERISA Section 408(b)(2) During Fiduciary Investment Advice Rule Transition Period | Practical Law