Are You Ready? Simplifying Tasks and Reducing Risk Under the Fiduciary Rule

July 5, 2017—The Department of Labor’s Fiduciary Rule, which changes the 401(k) and 403(b) investment management landscape for both plan sponsors and advisors, took effect June 9th. Are you ready? As a plan sponsor fiduciary, your responsibility – and potential liability – just increased!

When I discuss the new rule with employers they often show apprehension, which is understandable. They understand that their management as a fiduciary of their company retirement plan has always included serious potential pitfalls that could create personal liability. Under the new Fiduciary Rule, the number of those pitfalls has increased. What I share is good news for plan fiduciaries: that there are two steps they can take to make it easier to fulfill their new responsibilities and more effectively manage their increased risk.

Plan sponsors will find the requirements of the Fiduciary Rule most daunting if they are working with a broker or insurance representative. Historically, these advisors have been held to a lower standard regarding the advice they give concerning investments: the “suitability” rule. This allowed them to recommend investments that “fit investment need” but weren’t necessarily in the best interests of participants. Because brokers and insurance reps were usually compensated based on the products sold, their receipt of uneven compensation could influence their recommendations. Indirectly, many participants were negatively impacted by such conflicts of interests, paying higher fees or receiving lower investment returns.

The new DOL rule seeks to bring brokers and insurance reps to heel by establishing a stronger baseline of fiduciary protection. If they wish to continue providing advice to company retirement plans, they now will be held to a higher standard: the best interests of the client. And employers will need to monitor their activity to ensure these advisors are fully compliant.

This is where employers can simplify their lives by working with a Registered Investment Advisor. RIAs have been held to the fiduciary standard for more than half a century. Brokers and insurance representatives, by contrast, must adapt to a new way of operating, and their inexperience could prove a greater liability for employers than the Registered Investment Advisor who is comfortable with and committed to the fiduciary standard.

Employers’ lives can grow more complicated if they work with a broker or insurance representative who continues to receive commissions, 12b-1 fees, revenue sharing or any variable compensation from the sale of investment products, or if the advisor recommends proprietary products offered by their own firm. Under ERISA, these forms of compensation or representation of proprietary products are “prohibited transactions” for fiduciaries. However, the Fiduciary Rule allows an exemption from the requirement to avoid these prohibited transactions called the “Best Interest Contract Exemption” (BICE). So when BICE is adopted, plan sponsors must understand their advisor’s compensation and be able to demonstrate that it has not influenced the advisor’s investment recommendations.

I stated that employers who wish to minimize their potential liability would benefit from working with a Registered Investment Advisor because RIAs are experienced in following strict fiduciary standards. Employers who wish to further simplify their obligations can seek an advisor who also is willing to accept delegation to serve on their behalf as their plan’s Fiduciary Investment Manager.

Often described as a 3(38) advisor*, the Fiduciary Investment Manager agrees under ERISA Section 405(c) to take responsibility from the plan sponsor for the selection and monitoring of plan investments. In this case the Fiduciary Rule does not apply because the investment advisor is not providing advice to the plan sponsor regarding which investments should be in the fund lineup. Instead, they effectively replace the plan sponsor in this role. And participants benefit as a plan sponsor hires a Fiduciary Investment Manager because the Fiduciary Investment Manager must always act according to the fiduciary standard, there may be no prohibited transactions, and there is no “Best Interest Contract Exemption.”

As always, a good rule to remember is that if your advisor does not agree in writing to perform a role that reduces your liability, that reduction does not exist. Note that some advisors may agree in writing to provide investment advice, but that does not remove liability from the plan sponsor regarding investment monitoring and selection. Similarly, some big-brand record-keepers will offer a 3(38) service, but these services generally fall short of removing the responsibility of the plan sponsor for investment monitoring and selection.

If you have any doubts regarding the new Fiduciary Rule or where you stand regarding your new responsibilities, please give me a call. I can help!

*ERISA code section 3(38) defines who may serve as a Fiduciary Investment Manager. Only a Registered Investment Advisor, bank or insurance company can serve. Brokers cannot and it’s very rare to see a bank or insurance company serve because typically the bank or insurance company is selling its own proprietary products, which creates a prohibited transaction.


This blog is written to help make the lives of plan sponsors easier in the process of meeting legal requirements under ERISA for their defined contribution plans. Please understand that reading this blog should not alone take the place of a one-on-one consultation regarding the needs of your specific plan, and hence cannot be a guarantee against fiduciary breaches.