The DOL Rule is Dead – On June 21, 2018 the 5th Circuit Court of Appeals vacated the requirements of the U.S. Department of Labor’s (DOL) Conflict of Interest Rule—more commonly referred to as the “DOL Fiduciary Rule”—thus killing the rule entirely. Despite this news, the death of the DOL Fiduciary Rule does not alleviate a plan sponsor from being a fiduciary when sponsoring an ERISA-covered retirement plan, such as a 401(k).
The primary purpose of the DOL Fiduciary Rule was two-fold: 1) Broaden the existing definition of investment advice; and 2) Ensure that financial advisors and other professionals who provide investment advice on ERISA retirement plan and IRA assets do so absent any conflicts of interest—basically making all financial advisors who work with these types of assets ERISA fiduciaries. Note, many financial advisors today do not act as an ERISA fiduciary to their client’s retirement plan, because they are just providing investment education. However, some advisors do provide investment advice and will put in writing that they are acting as an ERISA fiduciary to the plan.
What This Means for Plan Sponsors
So how does the demise of the DOL Fiduciary Rule affect plan sponsors? It basically has little-to-no impact on a plan sponsor’s existing fiduciary responsibility. According to the DOL’s Meeting Your Fiduciary Responsibilities any individual who uses “discretion in administering and managing a plan or controlling the plan’s assets makes that person a fiduciary to the extent of that discretion or control.” The following are common fiduciary activities:
- Selecting, monitoring or replacing plan investment options
- Hiring, monitoring or firing of a plan service provide (e.g., recordkeeper, TPA, financial advisor)
- Timely depositing participant deferrals from their paycheck into the plan’s investment options
- Investing participant monies in the absence of a participant’s affirmative investment instructions (i.e., selecting a default investment option)
- Interpreting plan document provisions (e.g., determining if a loan or hardship withdrawal meets the plan’s definition)
Who is a Fiduciary?
Every ERISA plan must have a “named fiduciary” listed in the plan’s governing documents, and most often the employer is identified as the named fiduciary. But the named fiduciary can also be identified by individual employee name(s), position title(s) (e.g., CFO, CEO) as well as by committee (e.g., investment committee, plan committee). Named fiduciaries may also outsource their specific fiduciary functions to third parties who have the desired expertise to assist with plan administration, investments and management responsibilities. Note, even though certain functions may be outsourced, the named fiduciary still bears ultimate fiduciary responsibility for oversight of the plan and any outsourced fiduciary responsibilities.
But beware. Any person who acts or possesses fiduciary-like powers (i.e., exercises discretionary control over plan’s management or assets) can be deemed to be a “functional fiduciary”, whether or not said person is listed as a named fiduciary. Therefore, it’s imperative that plan sponsors identify all individuals within their organization who are considered an ERISA fiduciary.
Fulfilling your Duty
Recognizing all those serving in a fiduciary capacity is essential because ERISA mandates all fiduciaries to conduct themselves in accordance with the following duties:
- Duty of Loyalty – The duty to act solely in the interest of the plan participants and their beneficiaries.
- Exclusive Purpose Rule – The duty to ensure that plan expenses are reasonable.
- Duty of Prudence – The duty to act with the same degree of skill, care, prudence and diligence that a prudent person in a like capacity and familiar with such matters would use.
- Duty to Diversify – The duty to diversify plan investments in order to minimize the risk of large losses.
- Plan Governance Rule – The duty to follow the documents and instruments governing the plan to the extent they are consistent with ERISA requirements.
In applying all of these specific duties, it should be noted that fiduciary conduct under ERISA is not measured by the results achieved from fiduciary decisions, but rather by the process followed in making those decisions. According to ERISA attorney Marcia Wagner, “Given the procedural nature of these [fiduciary] requirements, a 401(k) plan sponsor can achieve compliance with ERISA’s fiduciary standards by adopting and maintaining a prudent process. Plan fiduciaries are typically judged by how they arrive at their investment decision with the information then available to them.” This is why many plans will adopt an Investment Policy Statement (IPS) to guide plan fiduciaries on selecting, monitoring and potentially replacing investment options.
Serving as an ERISA fiduciary should not be treated lightly, and despite ERISA-specific requirements for fiduciary conduct, those serving in a fiduciary capacity should not become overwhelmed. Plan sponsors should first require all those individuals within their organization serving as a fiduciary to read the DOL’s Meeting Your Fiduciary Responsibilities as a primer to this topic.
Also, talk to your property and casualty insurance provider about purchasing fiduciary liability insurance—optional insurance which protects plan fiduciaries in the unlikely event there is a breach of fiduciary responsibility. (Note, fiduciary liability insurance is different from the ERISA-required fidelity bond, which protects plan assets from theft/embezzlement).
Lastly, if you have additional questions or need help understanding and managing your fiduciary duty, we may be able to help. We are happy to provide additional resources, access to tools and education programs to help fiduciaries manage liability.
Allen Bronton, AIF®, PPC™
Clear Financial Strategies, LLC
5407 Trillium Blvd, Suite 210
Hoffman Estates, IL 60192
The information contained herein is intended for educational purposes only and is not intended to be a solicitation of products or services in jurisdictions in which we are not licensed. Clear Financial Strategies, LLC is a registered investment advisory firm licensed in IL and FL. We are able to license in any other state as necessary.
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements and you should consult your attorney or tax advisor for guidance on your specific situation.
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