By: Joseph P. Yonadi, Jr. and Patrick J. Egan
In 2016, during the waning days of the Obama Administration, the U.S. Department of Labor (DOL) issued a regulation expanding the fiduciary definition to cover more individuals and entities that provide financial services to retirement arrangements (the “Fiduciary Rule”). Since day one, the Fiduciary Rule has been engulfed in controversy and litigation. Further, the Trump Administration has shown little affection for the regulation and has deferred and delayed the complete implementation of the Fiduciary Rule on multiple occasions.
Further, during the past two weeks, the validity and future existence of the Fiduciary Rule has been called into serious question. First, in the case of Chamber of Commerce v. U.S. Department of Labor, No. 17-10238 (5th Cir. 2018, March 15, 2018), the Federal Court of Appeals for the Fifth Circuit vacated, in its entirety, the Fiduciary Rule. The Fifth Circuit determined that the DOL had exceeded its regulatory authority in promulgating the Fiduciary Rule. A day after the Fifth Circuit’s decision, the DOL announced that it would not enforce the Fiduciary Rule “pending further review.”
This one-two punch has suddenly placed the Fiduciary Rule on life support. The DOL could petition the U.S. Supreme Court to review and overturn the decision rendered by the Fifth Circuit; however, it is unclear that such an approach would be sanctioned by the Trump Administration. It is far more likely that the Fiduciary Rule will either be significantly curtailed or possibly rescinded.
Thus, employers who sponsor and administer 401(k) retirement plans may wonder what impact the decision rendered by the Fifth Circuit and the DOL’s announcement ultimately has on their 401(k) plans. The short answer – it depends.
In the context of retirement plans, the Fiduciary Rule impacts two areas: (1) the investment advice received by the plan and its investment committee; and (2) the investment guidance and assistance provided to plan participants.
The good news for most employers is that the substantial majority of financial professionals retained by employers to advise on their 401(k) plans have already contractually agreed to accept fiduciary responsibility in accordance with the provisions of the Fiduciary Rule. Thus, the underlying service agreements with these financial professionals have already been amended to acknowledge and accept fiduciary responsibility with respect to the advice and guidance provided to both the 401(k) plan and its investment committee, as well as any investment advice provided to plan participants. Therefore, the death of the Fiduciary Rule will not impact these employers or their 401(k) plans.
Where the issue could be more problematic involves situations in which the 401(k) plan utilizes brokers and insurance agents. For the first time, the Fiduciary Rule imposed fiduciary responsibilities on these types of financial professionals and restricted their ability to receive compensation via commissions. The death of the Fiduciary Rule will allow these type of financial professionals to avoid fiduciary responsibility under ERISA regarding the advice they provide to 401(k) plans and its participants.
Consequently, employers who sponsor 401(k) plans that utilize brokers and/or insurance agents may want to examine these relationships. It may be prudent to seek written assurance that these professionals will accept fiduciary responsibility with respect to the advice provided to the Plan and its participants. In the alternative, these employers may want to consider conducting a Request for Proposal (RFP) that requires all potential candidates to accept fiduciary responsibility under ERISA as a threshold requirement in order to submit a response to the RFP.
Employers should contact legal counsel if they are concerned about whether the financial professionals affiliated with their retirement plans are fiduciaries. Counsel will be able to analyze the current relationship between the parties and provide assistance in conducting an RFP.