Topics to be Discussed in this Three Part Fiduciary Education Series: 

Part 1: The New Fiduciary World: Regulation and Litigation Trends
Wednesday, January 18, 2017 | 10:00 a.m. – 11:00 a.m.
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Part 2: Benchmarking: Doing Your Fiduciary Due Diligence
Wednesday, January 25, 2017 | 10:00 a.m. – 11:00 a.m.
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Part 3: The New Fiduciary Regulation: What Sponsors Need to Know Moving Forward, Trumps Possible Effect
Wednesday, January 31, 2017 | 10:30 a.m. – 11:30 a.m.
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Fiduciary Insights

“I’m a Plan Sponsor. What Does the New Fiduciary Regulation Mean to Me?”
The Department of Labor’s new Fiduciary regulation will have a significant impact on retirement plan sponsors and your participants. Most of the public commentary focuses on the direct impact to your participants. It explores the safeguards that will give your employees greater protection from conflicted advice when they retire or terminate employment, and suddenly face tough decisions. Should I take a rollover? Should I roll it all? Where should I roll it? What do I buy with the rollover proceeds?
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This article focuses on the direct impact to plan sponsors. If you do not have a fiduciary adviser, this article is for you. If you do not know for sure whether you have a fiduciary adviser, this article is for you. In fact, even if you have a fiduciary adviser, the new guidance is relevant because it accentuates the value of a fiduciary, the standards to which the fiduciary is held, and changes in the way some fiduciaries may be paid.
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The Short Summary: The DOL believes plan sponsors are not adequately protected and face exposure if they receive recommendations from an adviser or broker that is not acting as a fiduciary. In an effort to provide those plan sponsors greater protection, the DOL has finalized an expanded definition of “Fiduciary” with a new Conflict of Interest Rule. This new guidance will cause current non-fiduciaries to: (1) actually accept responsibility for their recommendations; or (2) get out of the retirement plan business. It will also cause fiduciaries to plans larger than $50 million to change their compensation structure if they are paid by commissions or otherwise receive variable compensation through revenue sharing (rather than charging a level asset-based or flat fee).
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Does your plan have less than $50 million in plan assets? If so, the new regulation will consider your adviser or broker to be a fiduciary. Yes, that’s right. The purported non-fiduciary will no longer get to make that decision. It will be required to acknowledge fiduciary status in writing and to put your interests first. It also will be required to comply with the provisions of a prohibited transaction exemption. That exemption will be particularly burdensome for an adviser or broker that seeks to continue to be paid by revenue sharing or commissions, as it must: (1) notify the DOL; (2) adhere to impartial conduct standards; (3) adopt policies and procedures designed to ensure that their individual advisers adhere to those standards; (4) provide increased disclosures; and (5) retain additional records.
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Does your plan have at least $50 million in assets? If your adviser or broker currently functions in a non-fiduciary capacity, it may continue to do so only after satisfying the requirements of a carve-out. Take special note of one of those requirements; informing the plan sponsor that the adviser or broker is not undertaking to provide impartial advice. That is correct: you can retain your non-fiduciary relationship as long as you accept the non-fiduciary’s recognition that it need not be impartial.
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Why Does the DOL Believe Your Adviser Should Be a Fiduciary? The DOL previously finalized a regulation defining “Fiduciary” in 1975. A lot has changed since then. We have transitioned from a defined benefit culture – where plan sponsors made the decisions for employees (whether to participate, how much to “save”, how to invest, how to make a benefit last a lifetime). We now live in a participant-directed reality, in which employees make those decisions. Plan sponsors and participants receive recommendations and advice from a variety of advisers, yet the DOL has noted:
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  • “Under ERISA and the Code, if these advisers are not fiduciaries, they may operate with conflicts of interest that they need not disclose and have limited liability under federal pension law for any harms resulting from the advice they provide.”
  • “Having your investment adviser be a fiduciary is important because, under the Department’s regulatory package, it means that they are required to give you advice that is in your best interest, not their own.”
Many non-fiduciary providers argued that they should be able to merely disclose their way out of fiduciary status. The DOL saw through that attempt:
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  • “Disclosure alone has proven ineffective to mitigate conflicts in advice.”
  • “A disclosure regime, standing alone, would not obviate conflicts of interest in investment advice . . .”
The DOL was particularly worried about “retail investors”, which includes not only participants, but also plan sponsors of plans under $50 million:
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  • “[S]mall business sponsors of small plans are more like retail investors compared to large companies that often have financial departments and staff dedicated to running the company’s employee benefit plans;”
  • “Recommendations to retail investors and small plan providers are routinely presented as advice, consulting, or financial planning services.”
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Closing Comments. The new definition does not become effective until April of 2017, and some of the prohibited transaction exemption provisions do not kick in until January of 2018. The DOL provided for the delayed effective dates in response to the non-fiduciary providers’ calls for more time. They need time to determine whether to play in the fiduciary world and, if so, how to overhaul their business models to do so.
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Yet the intentional delay may have unintended consequences for plan sponsors currently using a non-fiduciary adviser or broker: what to do when the DOL has acknowledged holes in the protections afforded by the current relationship? We expect that difficult question will lead many plan sponsors to seek a fiduciary sooner, rather than later.
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We will have much more to come over the upcoming months. After all, there are over 1,000 pages in the guidance package released less than 48 hours before this article was written, and we expect to learn even more the second time through.
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