This one will be interesting. The Fiduciary regulation is – as far as regulations go – pretty clear in defining who is a fiduciary. The DOL sought to replace an old, subjective, five-part test with a principled approach that will create more certainty. For those who are familiar with fiduciary responsibilities, it appears the DOL will accomplish that goal.
Yet many of the soon-to-be new fiduciaries will be attempting to blur the lines. Why is that? Because those who are already fiduciaries are most likely to understand and embrace the new regulation, while those scheduled to be pulled in under the new regulation will be inclined to resist this change. Let’s briefly explore the DOL’s structure for determining “who” is a fiduciary under the new regulation. Then we’ll explain what this means to plan sponsors.
Who is a fiduciary? A “person” will be considered to render fiduciary advice as a fiduciary if he, she, or it meets the following three requirements (unless a carve-out applies):
- Receives a fee or other compensation, direct or indirect;
- Provides a “recommendation”; and
- Represents or acknowledges fiduciary status, renders the advice pursuant an agreement or understanding that it’s based on the particular needs of the advice recipient, or directs the advice to a specific recipient regarding the advisability of a particular investment.
The definition of “person” is broad. It pulls in just about anyone. In addition, each of those three requirements is broad and intended to pull more persons within the fiduciary framework. For example, as we’ll discuss further in the next blog entry, the definition of “recommendation” is a mouthful, including recommendations regarding whether to take a distribution or rollover, to what destination that distribution or rollover should be made, and the advisability of acquiring, holding, or selling securities or other investment property.
Will titles matter? No. A broker will be a fiduciary if he or she fits the three requirements above. So will an advisor, consultant, or broker-dealer. This is particularly important for those of you who have been under the impression that your broker or advisor is a fiduciary, despite the broker or advisor insisting to the contrary.
What about recordkeepers and TPAs? Your recordkeeper or TPA will not be a fiduciary merely by offering you an investment platform. But it might become a fiduciary by referring you to a specific investment manager or adviser. It also might become a fiduciary by recommending rollovers or distributions, and by making recommendations regarding the investment of the rollover or distribution proceeds. The nation’s largest recordkeepers are just starting the process of announcing whether they’ll embrace a fiduciary role in the distribution and rollover context.
How are current non-fiduciaries reacting? Some will try to become fiduciaries. Some will get out of the retirement business. Some brokers and advisors intend to retire altogether, in fear of compliance with the new rules and competing in the new environment! Others will attempt to find another fiduciary solution, such as a “bolt on” or “snap on” fiduciary service offered through the recordkeeper. When this happens, plan sponsors should ask themselves two questions:
- If my broker has to find someone else to be my fiduciary, how do I justify an ongoing fee to the broker?
- How will I fulfill my duty to monitor a service provider if I’m adding a fiduciary service from someone whom I’ll never meet and who provides, at most, information not personalized to my plan?
Stay Tuned. We’ll be back soon with an examination of “What” fiduciaries must do under the regulation.
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