By Randy Myers
A new fiduciary rule handed down by the U.S. Department of Labor (DOL) earlier this year will impact a wide range of constituents in the retirement industry, including the issuers of stable value contracts, according to industry experts who addressed the 2016 SVIA Fall Forum in Washington, D.C., in October.
Unveiled in April, the new rule expands the definition of a plan fiduciary under the Employee Retirement Income Security Act (ERISA) to include anyone making investment recommendations to a retirement plan sponsor or plan participant, or to the owner of an Individual Retirement Account (IRA). Those making such recommendations are now responsible for providing impartial advice that is in the client’s best interest. Fiduciaries cannot accept payments that would create a conflict of interest, either, unless they qualify for any of several exemptions or exceptions written into the rule. The new rule also expands the concept of investment advice to include, among other things, recommendations on account rollovers and account types.
Attorney Michael Richman, a Partner in the Employee Benefits and Executive Compensation Practice Group at Morgan, Lewis & Bockius LLP, said the new fiduciary rule is likely to have the biggest impact in the small retirement plan and IRA markets, where in the past many financial advisors were merely required to recommend investments that were suitable for their clients. He said it will have a profound effect on how products and services are sold and provided to ERISA-governed retirement plans and IRA holders, both by brokers and by recordkeeping and platform providers.
One of the challenges for those providers, Richman said, will be determining what constitutes a “recommendation” that imposes fiduciary responsibility. Pure investment education would not. The DOL also specified that firms and individual advisors can market their services under the so-called “hire me” exception without becoming a fiduciary.
However, advice that could reasonably be viewed as a suggestion to take or not take a particular course of action generally would confer fiduciary status—especially if it was tailored to an individual. So could recommendations as to account types and particular platforms or programs, or to roll over a plan or IRA balance to an advisor. Actions that might not constitute a recommendation individually, Richman cautioned, could be considered a recommendation in the aggregate.
The new rule provides a number of exceptions to the general imposition of fiduciary status, including the independent fiduciary exemption, which is a carve-out for transactions with large retirement plans, banks, insurance companies, and other institutions that are independent fiduciaries on their own. There is also a carve-out for advice given by one employee of a plan to another.
Meanwhile, under the “best interest contract,” or BIC, exemption, fiduciary advisors will still be able to receive compensation for a product or service that otherwise would be considered a prohibited transaction, provided they meet certain conditions aimed at protecting their clients’ interests.
Within the stable value marketplace, Richman said, exemptions and exceptions to fiduciary status may be available in a number of instances, including sales of wrap contracts, where the independent fiduciary exception may apply; marketing of stable value management or advisory services, where the independent fiduciary or “hire me” exceptions may be available; and communications to plan participants, where an education exception may apply. The BIC exemption may apply, he said, when insurance and annuity contracts are recommended to small plans not represented by a bank, insurance company or registered investment advisor.
Naturally, different firms are likely to make use of these exemptions and exceptions in different ways.
Tom Schuster, Vice President, Stable Value and Investment Products at MetLife, noted that MetLife’s stable value counterparties are almost exclusively major stable value managers and large plans. Their characteristics, he said, will allow MetLife to use the independent fiduciary exception when issuing wrap contracts, which in turn means that MetLife will not become a fiduciary when it transacts with a plan or pooled fund. “MetLife believes that relying on the best interest contract exemption, which requires acknowledging that the firm is a fiduciary and will act in the best interests of participants, enhances the risk of litigation,” he said. “MetLife will not write business relying on the BIC exemption.”
Schuster added that the SVIA is in the conceptual phase of considering a standard acknowledgement template that would outline the factual aspects of a wrap transaction. As envisioned, it would confirm that an issuer’s counterparty meets the requirements for an issuer to rely on the independent fiduciary exception. Nick Gage, head of the SVIA Government Relations Committee, is leading the initiative.
Schuster said he believes the DOL rule will be a major plus for stable value, in part because it imposes fiduciary status on an advisor who recommends that a plan participant roll out of a workplace retirement plan and into an IRA. That fiduciary burden, he said, is likely to cut such rollovers dramatically. If so, it could result in more money staying in defined contribution plans, where stable value investments are widely available, instead of going into IRAs. Further, the availability of the independent fiduciary exception means that operational complications of the rule will be minimal for most stable value market participants.
The new rule is scheduled to become applicable on April 10, 2017. While there has been some speculation that date could be postponed, Richman said a decision on that may not be known until after the general election in November, or even after the next president is seated. In addition to legislative proposals to repeal it, he said, the rule has been targeted by six lawsuits—since consolidated into four—for which hearings have been held but no decisions issued. Richman noted that past legislative efforts to block the rule have not been successful.