Many workers work for small firms who cannot afford to offer a retirement plan. This leaves these workers with limited resources to meet living expenses upon retirement. California is considering creating a plan, Secure Choice Retirement Program. It provides approximately eight million workers with a new means to retire.

The Problem

Over 75% of the state’s low and moderate income retirees rely on Social Security, leading to hardship. With each generation on track to retire poorer than the last, the strain on taxpayer funded health and human services will undermine the long-term stability of the state.

• Researchers at UC Berkeley say, nearly half of the state workers are on track to retire with incomes below 200 percent of the poverty level ($22,000 a year), a widely accepted threshold for serious hardship.
• Additionally, at least 62% of retirees rely on Social Security for more than half their income.
• The average monthly Social Security check is $1,328.

About 66% work for small businesses with less than 100 employees dominated by minorities. According to AARP (American Association of Retired Persons):

• 66% are workers of color
• 50% are Latino
• 60% are woman

,Those affected are are older and at the low end of the pay scale:

• According to the GAO (Government Accounting Office), 50% of households aged 55 or older have no retirement savings.
• 57% of current retirees are woman and makeup 70% of retirees in the bottom 25% of income, according to UC Berkeley.
• Workers with access to a workplace  plan are fifteen times more likely to save for retirement concludes AARP.

Employee Plan Features of Secure Choice

• It will be easy for workers to use the plan allows for auto payroll pay in of 3% of salary into a personal retirement plan, with the option to opt out or change pay ins at any time. It offers a bump of pay in up to 8% of pay with worker’s ability to stop or change the rate.
• The savings would be secure. For up to the first three years of the program, The state would establish managed accounts invested in U.S. Treasuries, or other low-risk investment, and develop options which address risk and smoothing of market losses and gains. Worker fees would be low. The state and its outside advisors, would have a fiduciary duty to the participants of the program.
• Changing jobs would not be a problem. Workers can pay in to their own account throughout their working life.

Employer Benefits

• Firms would be able to offer an added benefit. Firms would give workers access to an IRA account with limited duties and no fiduciary responsibility to the firm .
• It would appeal to small firms because it applies to firms with 5 or more workers, who do not offer a retirement plan. These firms will be required to offer an firm sponsored retirement plan, or provide their workers with access to the state’s Secure Choice Retirement Program.
• Mandated firms would be exempt from ERISA

Effect on Taxpayers:

• There would be no cost to taxpayers. The program would be self-funding through worker fees. The state would have no liability for the program funding or performance.
• By enabling workers to save for retirement, they may be less reliant on taxpayer funded public services when they reach retirement age.

This bill is a good start for workers of small firms to plan for their future. For other ways to plan for your retirement years, contact Simpson Capital. 

Here’s an article from CFAInsitute describing the DOL Rule Origin.

By Jim Allen, CFA

Baseball great Yogi Berra once said of a National League pennant race, “It ain’t over till it’s over.” If a group of nine industry organizations has its way, the Department of Labor’s (DOL’s) fiduciary rule, issued in April to address conflicts of interest in retirement advice, ain’t over either. In fact, there is a very good chance that it won’t be over for a while.

The organizations suing the DOL aren’t concerned so much with the best interest contract exemption requirement, or even the narrowing of investment options for personal retirement accounts. Make no mistake, the costs of such requirements and the expected loss of revenue and client assets are unwelcome outcomes for the businesses these organizations represent.

No, the industry is most concerned about the potential for trial lawyers to use the rule to launch a massive legal offensive on the financial sector aimed at advice given and investor outcomes. As one industry representative said to me after a panel discussion hosted by CFA Society Washington in April, “your members won’t like this.”

Making Enemies with Hardball Politics

It is no surprise that the DOL’s fiduciary rule has so many enemies. It will cut deeply into $18 billion in annual fees the industry now enjoys. Morningstar has estimated that upward of $3 trillion in assets under management will come into play as a consequence of the rule. When so much money, and the lifestyles that go with it, are threatened, one should expect a big fight.

But the Obama administration didn’t make things any easier for either itself or the rule’s supporters with its approach. From its decision at the launch in February 2015 to portray the problem as $17 billion of investor “losses” every year because of poor investment recommendations, to its choice of a progressive think tank to announce the final rule in April 2016, the administration brought its brand of hardball politics into what was previously a nonpartisan, or at least bipartisan, policy arena. By doing so, it also made support a partisan matter. That has not been good for anyone.

Politically speaking, the February 2015 rollout, replete with President Obama’s personal presence, was brilliant. It dared his opponents—and many inner-city allies—to publicly say they didn’t think it was a good idea for “financial advisors” to have their clients’ best interests in mind when suggesting retirement investment options. Opponents were stuck, initially, and unable to counter the argument that investment vehicles charging fees of 2% to 3% were inappropriate for many, if not most, retirement investors. But brilliant political moves do not necessarily mean good policy or good outcomes for real people.

When opponents regained their footing, they responded with the tried—and, to some disputed extent, true—rebuttal that such a proposal would deprive many low-income investors of professional investment advice. Small investors, they argued, would not have access to advice just when they might need it the most, such as after receiving a small inheritance. Of course, this line of reasoning did little to address the thorny matter of how a guaranteed-income annuity could drain a retirement account of years of earnings, or how some complex instruments sold to retirees were deemed appropriate.

The reasoning did consider, however, the very real possibility that without professional advice, some, and perhaps many, investors would have few options beyond a “safe” bank certificate of deposit, yielding less than 2% if you’re willing to put it away for five years. At those rates, the amount of time people would need to build a retirement nest egg would nearly triple.

Investors, Lawmakers Face Tough Choices to Move in Right Direction

Investors have to weigh their options and make difficult choices, sometimes concluding that a high-priced option is better than a low-yield option. As long as they are aware of the different options, and any in between, they might prefer the opportunity to weigh those trade-offs and make a decision based on what they believe will meet their needs best.

The problem is, they weren’t and aren’t aware. And they aren’t aware because of the subterfuge some parties to this lawsuit used to deliberately confuse investors. Use of the ever-so-subtle term “financial advisor” sounds awfully similar to the title, investment adviser, but they are anything but similar. I know the difference, and it still occasionally catches me off guard. The SEC should have stopped these deceptions years ago.

Like investors, politicians must also make difficult choices and accept legislation that is less than perfect to move things in the right direction. The desire for a higher standard of care might have been worth the Obama administration compromising on some provisions in this case. But President Obama and Labor Secretary Thomas Perez wanted it all, and they didn’t want to deal with trade-offs. They won, but as the pending lawsuits indicate, in the long run it may prove a Pyrrhic victory.

Maybe the Obama administration’s approach was needed to get movement on this difficult issue. With that much money at stake, it was going to take something drastic to get movement. But the hardball approach has its drawbacks, and those of us who favor a best interests standard must hope the politics used to get this rule through the system won’t come back to taint the term “fiduciary duty” for a generation to come.

Here is a good legal definition of fiduciary duty from Cornell Law website.

A fiduciary duty is a legal duty to act solely in another party’s interests. Parties owing this duty are called fiduciaries. The individuals to whom they owe a duty are called principals. Fiduciaries may not profit from their relationship with their principals unless they have the principals’ express informed consent. They also have a duty to avoid any conflicts of interest between themselves and their principals or between their principals and the fiduciaries’ other clients. A fiduciary duty is the strictest duty of care recognized by the US legal system.

Examples of fiduciary relationships include those between a lawyer and her client, a guardian and her ward, and a director and her shareholders.

Here’s an article written by CFA Insitute describing Morningstat’s analysis of the DOL Rule and the industry.

By Jim Allen, CFA

Washington, DC, is known—and regularly scorned—for its role in picking winners and losers through its legislation and regulation, a stigma that dates back centuries. So, it should come as no surprise that the Department of Labor’s (DOL’s) fiduciary duty rule, one of the most sweeping regulatory changes of recent decades, is widely expected to help some existing players while hurting others. Although the rules don’t involve direct infusions of money into the winners, it is expected, nevertheless, to produce changes in the way significant sums of investor money are invested.

Morningstar, a Chicago-based rating agency, has thoroughly assessed the new rules and determined that it will produce three primary trends.

First, it will shift customers from commission-based arrangements to fee-based structures, which is estimated to increase industry revenue by $13 billion.

Second, robo-advisers will likely pick up a large percentage of the $600 billion in low-net-worth IRA balances currently held by full-service wealth managers.

Third, it could lead to a significant increase in the use of passive investment products.
In aggregate, Morningstar predicted that $3 trillion in retail client assets are at stake, relating to $2.4 billion in fee revenue. That is more than double the $1.1 billion in compliance costs the industry estimates will be needed.

The Winners and Losers

On the basis of these trends, the rating firm concluded the rule will favor those engaged in discount brokerage as well as those selling exchange-traded products and index funds. By contrast, life insurers and alternative asset managers are seen as the likely losers. Their high commissions and vertical integration are the areas Morningstar believes will create the problems for insurers.

“[W]e believe that companies that rely heavily on annuity sales and investment services will feel the greatest impact,” Morningstar reported in its Financial Services Observer prior to release of the DOL’s rules. The rules “will make it very difficult for many investment agents and professionals to continue offering investment services and retirement products to clients.”

Morningstar highlighted two reasons why it will be difficult. First, the new rules will look at insurance agents advising about the sale of annuities as fiduciaries, and thus needing not only to enter best interest contracts with their clients, but also to justify high-cost investment instruments to skeptical regulators. Even worse, they will have to justify those instruments to skeptical trial attorneys.

Rise of Robo-Advisers and Passive Investing

The new rules are expected to have mixed effects on full-service wealth managers, although the overall effects will tend toward the negative. For example, Morningstar said the sector will encounter negative effects from the shift toward fee-based accounts, which, while producing higher revenues per account, will cause as much as $600 billion of low-net-worth IRA assets to find new investment channels. Among the beneficiaries will be firms offering advice through robo-advisory systems.

The shift toward robo-advisers is seen pushing such firms toward the critical threshold of $16 billion to $40 billion in collective assets under management, which is believed as the level they need to attain profitability. The use of robo-advisers, meanwhile, is seen directing investors toward passive investment products. Discount brokers, too, are seen furthering the trend toward passive investing because of the DOL rules.

It has been apparent since the introduction of the DOL’s rules in April 2015 that it would cause some firms to lose. The Morningstar report helps describe who the losers are as well as indicate who will be among the winners.

Here is an article written by CFA Institute describing panel discussion at NY Analyst Society meeting.

By Linda Rittenhouse, JD

When moderator Bob Dannhauser, CFA, head of private wealth management at CFA Institute, asked each panelist last Monday how likely it is that the Department of Labor (DOL) conflict of interest rules will take effect on the April 2017 target date, all answered “100%.” Only time will tell whether this forecast is accurate, especially given that two days after the New York Society of Security Analysts’ (NYSSA) event nine organizations filed a lawsuit to stop implementation of the rules.

If the panelists’ predictions hold true, participants in NYSSA’s Conflict of Interest Rule (Fiduciary Rule) Unwrapped event are a step ahead in navigating the compliance tributaries posed by the DOL’s 1,000 pages of final rules. The expert panelists — Greg Nowak (Pepper Hamilton), Tom Marsh (Deloitte), Rob Sichel (K&L Gates), and Kevin Walsh (Fidelity) — covered a range of topics aimed at highlighting the many business and legal considerations practitioners and firms must address to comply with the rules.

Not All Is Clear in the Rules

Not all aspects of the rules are straightforward or intuitive. For example, although ERISA (Employee Retirement Income Security Act of 1974) did not change, as Sichel noted, a redefinition of the scope of who is a fiduciary has “profound implications for the industry,” and particularly for the discretionary fiduciary. What constitutes a “recommendation” is pivotal, with even suggestions about whether to take or refrain from taking a certain course of action arguably tagging the provider with fiduciary status under the rules.

But the final rules streamline the regulations for “level fee fiduciaries,” making compliance easier for them. Another such nuance involves private funds, which are not subject to ERISA if no more than 25% of assets are from retirement accounts. However, engaging in certain promotional activities with respect to the funds may bump up against the fiduciary definition and trigger the need for compliance with those regulations.

Fees Exposed and Reduced

So, what are the business models that pose insurmountable problems? Nowak noted that the classic example is the retail broker/dealer selling variable annuities with hidden fees or revenue sharing agreements. And although disclosure could cure oversights in the past, that is no longer the case under these conflict of interest regulations. Walsh suggested a multistep framework for evaluating each business model for compliance by asking the following questions:

How are you paid?
What are your new products and how are you compensated for them?
What are possible issues when looking through the lens of existing business and new business models?
Marsh noted that although there is not one response, firms will be looking at client segmentation (for example, high net worth versus lower net worth), with an aim toward reducing risks and limiting platforms.

In regard to what clients should expect, Marsh believes the good news is that the new rules will reduce fees and provide greater transparency around those fees. Sichel thinks more than just fees will be affected; he believes the implicit message from the DOL is that retirement assets are better left in the workplace and that implementation of the rules is intended to curtail rollovers.

Active asset managers, contrary to what many doomsayers say, Marsh contends, will not have “a stake in the heart” because of the rules. Instead, the rules will serve as a rallying cry to get fees to the level they should be in a competitive environment.

Nowak agrees, predicting that managers that provide “pure advice” for a fee will be in high demand. He added that the new rules will force the industry to educate consumers and consequently allow managers to “take control back from distribution.”

All of this, of course, depends on the full implementation of the rules. What effect the ensuing court battle will have on the substance of the rules and effective date will unfold in the coming weeks and probably months. The DOL’s message until then is for investment managers to get their ducks in a row and move toward compliance. April 2017’s effective date will be here soon

Simpson Capital Management (SCM) is a “fiduciary” to its advisory clients. This means SCM has a fundamental obligation to act in the best interests of its clients and provide investment advice in its clients’ best interests. SCM owes its clients a duty of undivided loyalty and utmost good faith. The firm does not engage in any activity in conflict with the interest of any client and takes steps reasonably necessary to fulfill its obligations.

SCM employs reasonable care to avoid misleading clients and provides full and fair disclosure of all material facts to its clients and prospective clients. Generally, facts are “material” if a reasonable investor would consider them to be important. SCM seeks to eliminate, or at least disclose, all conflicts of interest which might incline the firm — consciously or unconsciously — to render advice which is not disinterested. SCM does not use its clients’ assets for its own benefit or the benefit of other clients, without client consent

Here’s an article written by CFA Institute explaining new DOL rule.

By Jim Allen, CFA

After more than a year of posturing, agonizing, and distress, the US Labor Department (DOL) has finally released its conflicts of interest and fiduciary rules for personal retirement accounts, including IRA rollovers. While the rules steadfastly maintain their requirement for a best-interests contract for most arrangements between investors and nonfiduciary advisers, the federal agency relented on a number of troublesome implementation matters, thus making it more palatable and implementable. Whether that will assuage the brokers and insurers who will be hardest hit is unlikely, but CFA Institute is pleased that the rules continue to move the business of advice in the direction of putting investors’ interests first.

To be sure, the rules are still complex and will be a pain to implement for those who aren’t already operating under a fiduciary duty requirement. They may even prove troublesome for those who already operate under a fiduciary duty, despite assurances to the contrary. Nevertheless, complexity is all but certain given the difficult task assigned to Labor, namely to assure that nonfiduciary practitioners give unconflicted advice to their retirement investor-clients. CFA Institute has long held that a simpler, more effective solution to investor confusion over these issues of standards of care would come from restricting the use of the term adviser — including its derivative using an “o” rather than an “e” — to those who must adhere to the Investment Advisers Act. Everyone else would call themselves a broker or salesperson. But that is a solution requiring action from the Securities and Exchange Commission (SEC), and therefore a matter for future advocacy.

In the following list, we note some of the most important changes DOL made to the final rule. The complete final rule can be found here.

Proprietary products: These products received a “greener” light in the final rules than originally proposed, though they still don’t sanction the use of high-risk, low-volume, or bespoke proprietary instruments in retirement accounts. In particular, the revisions appear to permit firms to offer and sell only their products under a best-interests contract exemption (BICE), without having to offer competing options to clients.

Longer Implementation: The phased-in implementation will now take up to 21 months to complete, as compared with the unreasonable and unworkable eight-month period originally proposed. This was seen by some as a sop to industry — indeed, it could be used to the advantage of those hoping to derail the rules. Ultimately, though, the longer lead time should give brokers time to adapt their delivery models and adjust how they do business with retirement customers.

Alerting Existing Clients: Firms won’t have to secure contracts with existing clients now. Rather, they can convey the change to the standards of care by email. The channel used to convey this information doesn’t really matter, though. What really matters is that the service provider will have to adhere to the best-interest standard. Because of that, we don’t believe getting the message to clients will be a problem, as service providers will want to hype how they are working on behalf of clients’ best interests. A lingering concern is that that spirit may not carry over to conversations about nonretirement investments, though that is a matter for the SEC to address.

New Customer Accounts: Service providers will be able to include the best-interest contract as part of the stack of documentation clients must sign to open an account under the final rules. That eliminates the potential fiduciary liability that could await service providers for marketing to potential new clients, regardless of whether they become clients.

Marketing of Plan Roll-Overs: The final rule will require a fiduciary duty beyond just recommendations about how to invest client money. In particular, recommendations about whether clients should take money out of a retirement plan such as a 401(k) now become fiduciary in nature.
Education: The final rule clarifies and grants greater leeway on educational exemptions. This is particularly useful to companies wanting to ensure employees in their defined-contribution plans receive basic investment information. The exemptions are much stricter, however, when they apply to individual retirement accounts, as DOL will treat references to specific investment options as advice rather than education.

Appraisals: In 2011, CFA Institute objected to the DOL’s original proposal, which sought to expand the definition of fiduciary well beyond those with direct discretion over the investment of client/beneficiary assets. Last year’s proposal eliminated most of those objectionable elements, but retained a proposal to impose a fiduciary duty on appraisals, which we also opposed for third-party appraisers. The new rule deferred a final decision on this for a separate rulemaking effort.

Low-Fee Products: Many financial service providers complained that the original proposal favored low-fee and low-cost products. CFA Institute expressed similar concern, arguing that such instruments were not always applicable to specific investor situations; that the proposal didn’t assure a low-cost investment; that it did not ensure a fiduciary standard of care; and that the proposal ultimately could lead to less-than-optimal outcomes for investors. The final rule helpfully clarifies that service providers do not have to recommend the lowest-cost investment option if a more appropriate option that better suits the clients’ needs is available. The best-interests requirement still carries the day, but enforcement, again, will be key.

Grandfathering of Existing Arrangements: DOL decided to let service providers continue to conduct business with clients under agreements signed before the rules become effective. This will include compensation from recommendations to hold and systematic purchase agreements. Advice provided post-implementation, however, will have to meet the DOL’s best-interest and reasonable compensation requirements.
Insurance Products: The BICE will allow advice relating to insurance products, and the disclosure requirements will be more compatible with the way that insurance products are sold. The changes also include a “streamlined exemption” for recommendations relating to fixed-rate annuities, but not for variable-rate annuities.

While the waiting for the final rules has ended, a new waiting period begins. This new period will be in anticipation of the legal challenge to these rules. It is unclear at this point whether the complaints will come from the securities brokerage or insurance industry. In that sense, the phased-in implementation concession allows opponents more time to file for legal delays before the industry starts to comply in earnest.

That will mean more posturing, agonizing, and distress for everyone.

Here is a fact sheet from the Department of Labor explaining the new fiduciary rules set to be effective in 2017.

FACT SHEET

U.S. Department of Labor
Employee Benefits Security Administration

Summary

Since 1974, when Congress enacted the Employee Retirement Income Security Act (ERISA), the Department of Labor (‘DOL’ or ‘Department’) has worked to protect America’s tax-preferred retirement savings. In the ensuing decades, there has been a dramatic shift in the retirement savings marketplace from employer-sponsored defined benefit plans to participant-directed 401(k) plans, coupled with the widespread growth in assets in Individual Retirement Accounts and Annuities (IRAs). When the basic rules governing retirement investment advice were created in 1975, 401(k) plans did not exist and IRAs had just been authorized. These rules have not been meaningfully changed since 1975.

The changes in the retirement landscape over the last 40 years have increased the importance of sound investment advice for workers and their families. While many advisers do act in their customers’ best interest, not everyone is legally obligated to do so. Many investment professionals, consultants, brokers, insurance agents and other advisers operate within compensation structures that are misaligned with their customers’ interests and often create strong incentives to steer customers into particular investment products. These conflicts of interest do not always have to be disclosed and advisers have limited liability under federal pension law for any harms resulting from the advice they provide to plan sponsors and retirement investors. These harms include the loss of billions of dollars a year for retirement investors in the form of eroded plan and IRA investment results, often after rollovers out of ERISA-protected plans and into IRAs.

The Department’s conflict of interest final rule and related exemptions will protect investors by requiring all who provide retirement investment advice to plans and IRAs to abide by a “fiduciary” standard—putting their clients’ best interest before their own profits. This final rulemaking fulfills the Department’s mission to protect, educate, and empower retirement investors as they face important choices in saving for retirement in their IRAs and employee benefit plans.

Background

Beginning in 2009, the Department of Labor undertook a multi-year regulatory project to address the problems with conflicts of interest in investment advice, balancing the need to better protect retirement savings while minimizing disruptions to the many good practices and good advice that the industry provides today.

From the outset, the project involved significant input from interested stakeholders, including two separate proposals published for public comment in 2010 and 2015. The Department held multi-day public hearings on the 2010 and 2015 proposals, hundreds of individual meetings with a wide range of stakeholders, and published the public comments and hearing transcripts on the DOL website. Thousands of comments and petitions came from consumer groups, plan sponsors, financial services companies, academics, elected government officials, trade and industry associations, and others, both in support of and in opposition to the proposals.

After careful consideration of the issues raised by the written comments, hearing testimony, and the extensive public record, the Department is adopting a final rule and related final exemptions. The final rule defines who is a fiduciary investment adviser, while accompanying prohibited transaction class exemptions allow certain broker-dealers, insurance agents and others that act as investment advice fiduciaries to continue to receive a variety of common forms of compensation as long as they are willing to adhere to standards aimed at ensuring that their advice is impartial and in the best interest of their customers. The rulemaking package also includes a regulatory impact analysis which demonstrates the monetary harm caused to retirement investors from conflicted advice and the gains that will result from the rule.

Going forward, those that provide investment advice to plans, plan sponsors, fiduciaries, plan participants, beneficiaries and IRAs and IRA owners must either avoid payments that create conflicts of interest or comply with the protective terms of an exemption issued by the Department. Under new exemptions adopted with the rule, firms will be obligated to acknowledge their status and the status of their individual advisers as “fiduciaries.” Firms and advisers will be required to make prudent investment recommendations without regard to their own interests, or the interests of those other than the customer; charge only reasonable compensation; and make no misrepresentations to their customers regarding recommended investments. Together, the rule and exemptions impose basic standards of professional conduct that are intended to address an annual loss of billions of dollars to ordinary retirement investors as a result of conflicted advice.

For more details about changes made from the 2015 proposed regulatory package to the final rule and exemptions, refer to the “Chart Illustrating Changes from Department of Labor’s 2015 Conflict of Interest Proposal to Final.”

What Is Covered Investment Advice Under the Rule?

The rule describes the kinds of communications that would constitute investment advice and then describes the types of relationships in which those communications would give rise to fiduciary investment advice responsibilities.

Covered investment advice is defined as a recommendation to a plan, plan fiduciary, plan participant and beneficiary and IRA owner for a fee or other compensation, direct or indirect, as to the advisability of buying, holding, selling or exchanging securities or other investment property, including recommendations as to the investment of securities or other property after the securities or other property are rolled over or distributed from a plan or IRA.

Covered investment advice also includes recommendations as to the management of securities or other investment property, including, among other things, recommendations on investment policies or strategies, portfolio composition, selection of other persons to provide investment advice or investment management services, selection of investment account arrangements (e.g., brokerage versus advisory); or recommendations with respect to rollovers, transfers, or distributions from a plan or IRA, including whether, in what amount, in what form, and to what destination such a rollover, transfer, or distribution should be made.

Under the final rule, the fundamental threshold element in establishing the existence of fiduciary investment advice is whether a “recommendation” occurred. A “recommendation” is a communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action. The more individually tailored the communication is to a specific advice recipient or recipients, the more likely the communication will be viewed as a recommendation. The Department has taken an approach to defining “recommendation” that is consistent with and based upon the approach taken by the Financial Industry Regulatory Authority (FINRA), the independent regulatory authority of the broker-dealer industry, subject to the oversight of the Securities and Exchange Commission (SEC).

The types of relationships that must exist for such recommendations to give rise to fiduciary investment advice responsibilities include recommendations made either directly or indirectly (e.g. through or together with any affiliate) by a person who:

Represents or acknowledges that they are acting as a fiduciary within the meaning of ERISA or the Internal Revenue Code (Code);
Renders advice pursuant to a written or verbal agreement, arrangement or understanding that the advice is based on the particular investment needs of the advice recipient; or
Directs the advice to a specific recipient or recipients regarding the advisability of a particular investment or management decision with respect to securities or other investment property of the plan or IRA.

The recommendation must be provided in exchange for a “fee or other compensation.” “Fee or other compensation, direct or indirect” means any explicit fee or compensation for the advice received by the person (or by an affiliate) from any source, and any other fee or compensation received from any source in connection with or as a result of the recommended purchase or sale of a security or the provision of investment advice services including, though not limited to, such things as commissions, loads, finder’s fees, and revenue sharing payments. A fee or compensation is paid “in connection with or as a result of” such transaction or service if the fee or compensation would not have been paid but for the transaction or service or if eligibility for or the amount of the fee or compensation is based in whole or in part on the transaction or service.

What Is Not Covered Investment Advice Under the Rule?

Not all communications with financial advisers will be covered fiduciary investment advice. As a threshold issue, if the communications do not meet the definition of “recommendations” as described above, the communications will be considered non-fiduciary. In response to requests from commenters, and for clarification, the final rule includes some specific examples of communications that would not rise to the level of a recommendation and therefore would not constitute a fiduciary investment advice communication. A number of these provisions reflect changes and clarifications from the 2015 proposal in response to public comments.

Education

For example, the Department believes that education about retirement savings and general financial and investment information is not only beneficial and helpful to plans, plan participants, and IRA owners, but may not rise to the level of recommendations as defined in the final rule.

Education as defined in the rule will not constitute advice regardless of who provides the educational information (e.g. the plan sponsor or service provider), the frequency with which the information is shared, or the form in which the information and materials are provided (e.g. on an individual or group basis, in writing or orally, via a call center, or by way of video or computer software). In response to comments on the 2015 proposal, in the plan context, the education provision allows specific investment alternatives to be included as examples in presenting hypothetical asset allocation models or in interactive investment materials intended to educate participants and beneficiaries as to what investment options are available under the plan so long as they are designated investment alternatives selected or monitored by an independent plan fiduciary and other conditions are met. In contrast, because there is no similar independent fiduciary in the IRA context, the investment education provision in the rule does not treat asset allocation models and interactive investment materials with references to specific investment alternatives as merely “education.”

General Communications

Similarly, general communications that a reasonable person would not view as an investment recommendation, including general circulation newsletters; commentary in publicly broadcast talk shows; remarks and presentations in widely attended speeches and conferences; research or news reports prepared for general distribution; general marketing materials, and general market data including data on market performance, market indices, or trading volumes, price quotes, performance reports, or prospectuses would not constitute communications that are considered recommendations.

Platform Providers

Service providers, such as recordkeepers and third-party administrators, often offer a “platform” or selection of investment alternatives to plan fiduciaries who choose the specific investment alternatives that will be made available to participants for investing funds in their individual accounts. Simply making available a platform of investment alternatives without regard to the individualized needs of the plan, its participants, or beneficiaries if the plan fiduciary is independent of such service provider would not constitute communications that would be considered recommendations under the final rule – provided that such provider also represents in writing to the plan fiduciary that they are not undertaking to provide impartial investment advice or to give advice in a fiduciary capacity.

Transactions with Independent Plan Fiduciaries with Financial Expertise

Under the final rule, ERISA fiduciary obligations are not imposed on advisers when communicating with independent plan fiduciaries if the adviser knows or reasonably believes that the independent fiduciary is a licensed and regulated provider of financial services (banks, insurance companies, registered investment advisers, broker-dealers) or those that have responsibility for the management of $50 million in assets, and other conditions are met. The conditions are designed to make sure this exclusion is limited to true arm’s length transactions between advisers and investment professionals or large asset managers who do not have a legitimate expectation that they are in a relationship where they can rely on the other adviser for impartial advice.

Swap and Security-Based Swap Transactions

Communications and activities made by advisers to ERISA-covered employee benefit plans in swap or security-based swap transactions do not result in the advisers becoming investment advice fiduciaries to the plan if certain conditions are met. This provision in the final rule has been coordinated with both the SEC and the Commodity Futures Trading Commission (CFTC) to be sure there is no conflict with the swap and security-based swap rules promulgated by those agencies under the Dodd–Frank Wall Street Reform and Consumer Protection Act.

Employees of Plan Sponsors, Affiliates, Employee Benefit Plans, Employee Organizations, or Plan Fiduciaries

Employees working in a company’s payroll, accounting, human resources, and financial departments who routinely develop reports and recommendations for the company and other named fiduciaries of the sponsors’ plans are not investment advice fiduciaries if the employees receive no fee or other compensation in connection with any such recommendations beyond their normal compensation for work performed for their employer.

Further, this exclusion also covers communications between employees, such as human resources department staff who communicate information to other employees about the plan and distribution options in the plan, as long as they meet certain conditions e.g. they are not registered or licensed advisers under securities or insurance laws and receive only their normal compensation for work performed by the employer.

The Best Interest Contract: Stronger Protections for Retirement Savings

In order to ensure retirement investors receive advice that is in their best interest while also allowing advisers to continue receiving commission-based compensation, the Department is issuing the Best Interest Contract Exemption (which some refer to as the BIC or BICE). Under ERISA and the Code, individuals providing fiduciary investment advice to plan sponsors, plan participants, and IRA owners are not permitted to receive payments creating conflicts of interest without a prohibited transaction exemption (PTE). ERISA authorizes the Secretary of Labor to grant PTEs.

The Best Interest Contract Exemption permits firms to continue to rely on many current compensation and fee practices, as long as they meet specific conditions intended to ensure that financial institutions mitigate conflicts of interest and that they, and their individual advisers, provide investment advice that is in the best interests of their customers. Specifically, in order to align the adviser’s interests with those of the plan or IRA customer, the exemption requires the financial institution to acknowledge fiduciary status for itself and its advisers. The financial institution and advisers must adhere to basic standards of impartial conduct, including giving prudent advice that is in the customer’s best interest, avoiding making misleading statements, and receiving no more than reasonable compensation. The financial institution also must have policies and procedures designed to mitigate harmful impacts of conflicts of interest and must disclose basic information about their conflicts of interest and the cost of their advice. The 2015 proposal limited the asset classes covered by the Best Interest Contract Exemption but in response to comments, the final exemption covers recommendations concerning any investment product if the conditions of the exemption are satisfied.

In the Department’s view, disclosure alone is not sufficiently protective in the absence of the other regulatory safeguards, but information can and should be made available to investors that want it. Accordingly, the Best Interest Contract Exemption includes disclosure requirements, including descriptions of material conflicts of interest, fees or charges paid by the retirement investor, and a statement of the types of compensation the firm expects to receive from third parties in connection with recommended investments. Investors also have the right to obtain specific disclosure of costs, fees, and other compensation upon request. In addition, a website must be maintained and updated regularly that includes information about the financial institution’s business model and associated material conflicts of interest, a written description of the financial institution’s policies and procedures that mitigate conflicts of interest, and disclosure of compensation and incentive arrangements with advisers, among other information. Individualized information about a particular adviser’s compensation is not required to be included on the website.

The exemption provides for enforcement of the standards it establishes. When providing advice to an IRA owner, the financial institution must commit to these protective conditions as part of an enforceable contract. ERISA plan investors will be able to rely on their advisers’ fiduciary acknowledgement to assert their rights under ERISA’s statutory protections. If advisers and financial institutions do not adhere to the standards established in the exemption, retirement investors will have a way to hold them accountable—either through a breach of contract claim (for IRAs and other non-ERISA plans) or under the provisions of ERISA (for ERISA plans, participants, and beneficiaries).

Investors will not be able to use this enforcement mechanism simply because they did not like how an investment turned out; consistent with long-existing ERISA jurisprudence, advisers can usually prove they have acted in their clients’ best interest by documenting their use of a reasonable process and adherence to professional standards in deciding to make the recommendation and determining it was in the customer’s best interest, and by documenting their compliance with the financial institution’s policies and procedures required by the Best Interest Contract Exemption. This helps retirement savers get best interest financial advice while leaving the adviser and financial institution the flexibility and discretion necessary to determine how best to satisfy the exemption’s standards in light of the unique attributes of their business.

Additional Exemptive Relief

In addition to the Best Interest Contract Exemption, the Department is issuing a Principal Transactions Exemption, which permits investment advice fiduciaries to sell or purchase certain recommended debt securities and other investments out of their own inventories to or from plans and IRAs. As with the Best Interest Contract Exemption, this requires, among other things, that investment advice fiduciaries adhere to certain impartial conduct standards, including obligations to act in the customer’s best interest, avoid misleading statements, and seek to obtain the best execution reasonably available under the circumstances for the transaction.

The Department is also finalizing an amendment to an existing exemption, PTE 84-24, which provides relief for insurance agents and brokers, and insurance companies, to receive compensation for recommending fixed rate annuity contracts to plans and IRAs. As amended, PTE 84-24 contains increased safeguards for the protection of retirement investors. This exemption has more streamlined conditions than the Best Interest Contract Exemption, which will facilitate access by plans and IRAs to these relatively simple lifetime income products. More complex products, such as variable annuities and indexed annuities, will be able to be recommended by advisers and financial institutions under the terms of the Best Interest Contract Exemption. In response to comments received by the Department, the Best Interest Contract Exemption has been revised to facilitate compliance with the exemption by insurers and their agents, and additional guidance for insurers has been provided.

The Department is amending other existing exemptions, as well, to ensure that plan and IRA investors receiving investment advice are consistently protected by impartial conduct standards, regardless of the particular exemption upon which the adviser relies.

Applicability Date

Compliance with the new requirements will not begin to be required until one year after the final rule is published in the Federal Register — in other words, April 2017. The Department has determined that, in light of the importance of the final rule’s consumer protections and the significance of the continuing monetary harm to retirement investors without the rule’s changes, an applicability date of one year after publication of the final rule in the Federal Register is appropriate and provides adequate time for plans and their affected financial services and other service providers to adjust to the change from non-fiduciary to fiduciary status.

The exemptions will generally become available upon the applicability date of the rule. However, the Department has adopted a “phased” implementation approach for the Best Interest Contract Exemption and the Principal Transactions Exemption. Both exemptions provide for a transition period, from the April 2017 applicability date to January 1, 2018, under which fewer conditions apply. This period is intended to give financial institutions and advisers time to prepare for compliance with all the conditions of the exemptions while safeguarding the interests of retirement investors. During this period, firms and advisers must adhere to the impartial conduct standards, provide a notice to retirement investors that, among other things, acknowledges their fiduciary status and describes their material conflicts of interest, and designate a person responsible for addressing material conflicts of interest and monitoring advisers’ adherence to the impartial conduct standards. Full compliance with the exemption will be required as of January 1, 2018.

The Department will work with interested parties on compliance assistance activities and materials and invites stakeholders to identify areas or specific issues where they believe additional clarifying guidance is needed.

Today, I’m calling on the Department of Labor to update the rules and requirements that retirement advisors put the best interests of their clients above their own financial interests. It’s a very simple principle: You want to give financial advice, you’ve got to put your client’s interests first. – President Barack Obama, February 23, 2015

Middle class economics means that Americans should be able to retire with dignity after a lifetime of hard work. But loopholes in the retirement advice rules have allowed some brokers and other advisers to recommend products that put their own profits ahead of their clients’ best interest, hurting millions of America’s workers and their families.

A system where firms can benefit from backdoor payments and hidden fees often buried in fine print if they talk responsible Americans into buying bad retirement investments—with high costs and low returns—instead of recommending quality investments isn’t fair. A White House Council of Economic Advisers analysis found that these conflicts of interest result in annual losses of about 1 percentage point for affected investors—or about $17 billion per year in total. To demonstrate how small differences can add up: A 1 percentage point lower return could reduce your savings by more than a quarter over 35 years. In other words, instead of a $10,000 retirement investment growing to more than $38,000 over that period after adjusting for inflation, it would be just over $27,500.

In February, the President directed the Department of Labor to move forward with a proposed rulemaking to require retirement advisers to abide by a “fiduciary” standard—putting their clients’ best interest before their own profits. And today, the Department of Labor is taking the next step toward making that a reality, by issuing a Notice of Proposed Rulemaking (NPRM) to require that best interest standard across a broader range of retirement advice to protect more investors.

Today’s proposal is the result of years of work and reflects feedback from a broad range of stakeholders—including industry, consumer advocates, Congress, retirement groups, academia, and the American public. The proposal includes broad, flexible exemptions from certain obligations associated with a fiduciary standard that will help streamline compliance while still requiring advisers to serve the best interest of their clients.

In the coming months, the Administration welcomes comments on the proposal and looks forward to working with all stakeholders to achieve the commonsense goals of the rule while minimizing disruptions to the many good practices in industry. Many advisers already put their customers’ best interest first. They are hardworking men and women who got into this work to help families achieve retirement security. They deserve a level playing field, and their clients deserve the quality advice that this rule will ensure.

Summary of Today’s Action to Protect Retirement Savers by the Department of Labor

Today, the Department of Labor issued a proposed rulemaking to protect investors from backdoor payments and hidden fees in retirement investment advice.

Backdoor Payments & Hidden Fees Often Buried in Fine Print Are Hurting the Middle Class: Conflicts of interest cost middle-class families who receive conflicted advice huge amounts of their hard-earned savings. Conflicts lead, on average, to about 1 percentage point lower annual returns on retirement savings and $17 billion of losses every year.

The Department of Labor is protecting families from conflicted retirement advice. The Department issued a proposed rule and related exemptions that would require retirement advisers to abide by a “fiduciary” standard—putting their clients’ best interest before their own profits.
The Proposed Rule Would Save Tens of Billions of Dollars for Middle Class and Working Families: A detailed Regulatory Impact Analysis (RIA) released along with the proposal and informed by a substantial review of the scholarly literature estimates that families with IRAs would save more than $40 billion over ten years when the rule and exemptions, if adopted as currently proposed, are fully in place, even if one focuses on just one subset of transactions that have been the most studied.

The Administration Welcomes Feedback: The issuance of a notice of proposed rulemaking and proposed exemptions begins a process of seeking extensive public feedback on the best approach to modernize the rules of the road on retirement advice and set new standards, while minimizing any potential disruption to the many good practices in the marketplace. The proposal asks for comments on a number of important issues. We look forward to hearing from all stakeholders. Any final rule and exemptions will reflect this input.
Updating Our Outdated Retirement Protections

Since 1974, the Employee Retirement Income Security Act (ERISA) has provided the Department of Labor (DOL) with authority to protect America’s tax-preferred retirement savings, recognizing the importance of consumer protections for a basic retirement nest egg and the significant tax incentives provided to encourage Americans to save for retirement. But the basic rules governing retirement investment advice have not been meaningfully changed since 1975, despite the dramatic shift in our private retirement system away from defined benefit plans and into self-directed IRAs and 401(k)s. That shift means good investment advice is more important than ever. Today, DOL is proposing a new rule that will seek to:

Require more retirement investment advisers to put their client’s best interest first, by expanding the types of retirement investment advice covered by fiduciary protections. Today large loopholes in the definition of retirement investment advice under outdated DOL rules expose many middle-class families, and especially IRA owners, to advice that may not be in their best interest. Under DOL’s proposed definition, any individual receiving compensation for providing advice that is individualized or specifically directed to a particular plan sponsor (e.g., an employer with a retirement plan), plan participant, or IRA owner for consideration in making a retirement investment decision is a fiduciary. Such decisions can include, but are not limited to, what assets to purchase or sell and whether to rollover from an employer-based plan to an IRA. The fiduciary can be a broker, registered investment adviser, insurance agent, or other type of adviser (together referred to as “advisers” here). Some of these advisers are subject to federal securities laws and some are not. Being a fiduciary simply means that the adviser must provide impartial advice in their client’s best interest and cannot accept any payments creating conflicts of interest unless they qualify for an exemption intended to assure that the customer is adequately protected. DOL’s regulatory impact analysis estimates that the rule and related exemptions would save investors over $40 billion over ten years, even if one focuses on just one subset of transactions that have been the most studied. The real savings from this proposal are likely much larger as conflicts and their effects are both pervasive and well hidden.

Preserve access to retirement education. The Department’s proposal carefully carves out education from the definition of retirement investment advice so that advisers and plan sponsors can continue to provide general education on retirement saving across employment-based plans and IRAs without triggering fiduciary duties. As an example, education could consist of general information about the mix of assets (e.g., stocks and bonds) an average person should have based on their age, income, and other circumstances, while avoiding suggesting specific stocks, bonds, or funds that should constitute that mix. This carve-out is similar to previously issued guidance to minimize the compliance burden on firms, but clarifies that references to specific investments would constitute advice subject to a fiduciary duty.
Distinguish “order-taking” as a non-fiduciary activity. As under the current rules, when a customer calls a broker and tells the broker exactly what to buy or sell without asking for advice, that transaction does not constitute investment advice. In such circumstances, the broker has no fiduciary responsibility to the client.

Carve out sales pitches to plan fiduciaries with financial expertise. Many large employer-based plans are managed by financial experts who are themselves fiduciaries and work with brokers or other advisers to purchase assets or construct a portfolio of investments that the plan offers to plan participants. In such circumstances, the plan fiduciary is under a duty to look out for the participants’ best interest, and understands that if a broker promotes a product, the broker may be trying to sell them something rather than provide advice in their best interest. Accordingly, the proposed rule does not consider such transactions fiduciary investment advice if certain conditions are met.
Lead to gains for retirement savers in excess of $40 billion over the next 10 years, even if one focuses on just one subset of transactions that have been the most studied, according to the regulatory impact analysis released with the NPRM. These gains would be particularly important for the more than 40 million American families with more than $7 trillion in IRA assets, as advice regarding IRA investments is rarely protected under the current ERISA and Internal Revenue Code rules. Moreover, hundreds of billions of dollars are rolled over from plans to IRAs every year. Consumers are especially vulnerable to bad advice regarding rollovers because they represent such a large portion of their savings and because such transactions are also rarely covered under the current rules.

Complying with the Proposed Rule

At present, individuals providing fiduciary investment advice to employer-based plan sponsors and plan participants are required to act impartially and provide advice that is in their clients’ best interest. Under ERISA and the Internal Revenue Code, individuals providing fiduciary investment advice to plan sponsors, plan participants, and IRA owners are not permitted to receive payments creating conflicts of interest without a prohibited transaction exemption (PTE). Drawing on comments received and in order to minimize compliance costs, the proposed rule creates a new type of PTE that is broad, principles-based and adaptable to changing business practices. This new approach contrasts with existing PTEs, which tend to be limited to much narrower categories of specific transactions under more prescriptive and less flexible conditions. The “best interest contract exemption” will allow firms to continue to set their own compensation practices so long as they, among other things, commit to putting their client’s best interest first and disclose any conflicts that may prevent them from doing so. Common forms of compensation in use today in the financial services industry, such as commissions and revenue sharing, will be permitted under this exemption, whether paid by the client or a third party such as a mutual fund. To qualify for the new “best interest contract exemption,” the company and individual adviser providing retirement investment advice must enter into a contract with its clients that:

Commits the firm and adviser to providing advice in the client’s best interest. Committing to a best interest standard requires the adviser and the company to act with the care, skill, prudence, and diligence that a prudent person would exercise based on the current circumstances. In addition, both the firm and the adviser must avoid misleading statements about fees and conflicts of interest. These are well-established standards in the law, simplifying compliance.

Warrants that the firm has adopted policies and procedures designed to mitigate conflicts of interest. Specifically, the firm must warrant that it has identified material conflicts of interest and compensation structures that would encourage individual advisers to make recommendations that are not in clients’ best interests and has adopted measures to mitigate any harmful impact on savers from those conflicts of interest. Under the exemption, advisers will be able to continue receiving common types of compensation.
Clearly and prominently discloses any conflicts of interest, like hidden fees often buried in the fine print or backdoor payments, that might prevent the adviser from providing advice in the client’s best interest. The contract must also direct the customer to a webpage disclosing the compensation arrangements entered into by the adviser and firm and make customers aware of their right to complete information on the fees charged.

In addition to the new best interest contract exemption, the proposal proposes a new, principles-based exemption for principal transactions and maintains or revises many existing administrative exemptions. The principal transactions exemption would allow advisers to recommend certain fixed-income securities and sell them to the investor directly from the adviser’s own inventory, as long as the adviser adhered to the exemption’s consumer-protective conditions.

Finally, the proposal asks for comment on whether the final exemptions should include a new “low-fee exemption” that would allow firms to accept payments that would otherwise be deemed “conflicted” when recommending the lowest-fee products in a given product class, with even fewer requirements than the best interest contract exemption.

Strengthening Enforcement of Consumer Protections

Existing loopholes mean that many retirement advisers do not consider themselves fiduciaries. As a result, consumers have limited, if any, recourse under ERISA and the Internal Revenue Code if their retirement adviser recommends products that are in the adviser’s interest rather than the consumer’s. The proposal will not only make more advisers fiduciaries but also ensure they are held accountable to their clients if they provide advice that is not in their clients’ best interest, because:

DOL currently has the right to bring enforcement actions against fiduciary advisers to plan sponsors and participants who do not provide advice in their clients’ best interest. As under current law, the plan sponsor or plan participant harmed by the bad advice can also bring their own action.

The “best interest contract exemption” allows customers to hold fiduciary advisers accountable for providing advice in their best interest through a private right of action for breach of contract. In other words, if an adviser isn’t putting their client’s interest first, the client can take action to hold them accountable. This option is especially important for advice regarding IRA investments because otherwise neither DOL nor the saver who is harmed can hold the adviser accountable for the losses the saver suffered. The contract can require that individual disputes be handled through arbitration but must give clients the right to bring class action lawsuits in court if a group of people are harmed. This feature of the best interest contract exemption is modeled on the rules under FINRA, which is a non-governmental organization that regulates advice by brokers to invest in securities but not other types of retirement savings covered by ERISA.

The IRS can impose an excise tax on transactions based on conflicted advice that is not eligible for one of the many proposed exemptions. As under current law, the Internal Revenue Code imposes an excise tax and can require correction of such transactions involving plan sponsors, plan participants and beneficiaries, and IRA owners.
Process Going Forward

The Administration invites stakeholders from all perspectives to submit comments during the 75-day notice and comment period or through the public hearing to be scheduled shortly after the close of the initial public comment hearing. The public record will be reopened for comment after the public hearing is held. Only after reviewing all the comments will the Administration decide what to include in a final rule—and even once the Department of Labor ultimately issues a final rule, it will not go into effect immediately.

How Is This Rule Different from the Proposal in 2010?

In 2010, DOL put forward a proposal to require more retirement investment advice to be in the client’s best interest. While many championed the goals of the proposal, some stakeholders expressed concerns during the notice and comment period and at a public hearing. Mindful of these criticisms, and wanting to arrive at the right answer, DOL decided to withdraw the rule and go back to the drawing board. Since 2011, both DOL and the White House have engaged extensively with stakeholders, meeting with industry, advocates, academics—anyone who can help us figure out the best way to craft a rule that adequately protects consumers and levels the playing field for the many advisers doing right by their clients, while minimizing compliance burdens.

The proposal released today has improved upon the 2010 version in a number of ways, both in process and substance:

DOL has improved the process to better incorporate stakeholder feedback.
DOL is issuing proposed exemptions simultaneous with the proposed rule. Responding to comments received in 2010, DOL is publishing the proposed exemptions alongside the rule so interested parties have a better sense of how the fiduciary requirements and exemptions work together.
DOL has consulted extensively with the Securities and Exchange Commission (SEC) and other federal stakeholders. Secretary Perez and Chair White have had numerous meetings and conversations, and SEC staff has provided technical assistance and will continue these discussions.
DOL is releasing a more rigorous analysis of the anticipated gains to investors and costs of the rule. Since 2010, the body of independent research on the costs and consequences of conflicts of interests in retirement investment advice has grown significantly. Today, DOL is releasing a Regulatory Impact Analysis (RIA) alongside the rule that reflects that substantial body of research and estimates the gains to investors and costs of the proposed rule.

The rule’s substance has changed based on comments received since 2010. Specifically, the proposal:
Provides a new, broad, principles-based exemption that can accommodate and adapt to the broad range of evolving business practices. Industry commenters emphasized that the existing exemptions are too rigid and prescriptive, leading to a patchwork of exemptions narrowly tailored to meet specific business practices and unable to adapt to changing conditions. Drawing on these and other comments, the best interest contract exemption represents an unprecedented departure from the Department’s approach to PTEs over the past 40 years. Its broad and principles-based approach is intended to streamline compliance and give industry the flexibility to figure out how to serve their clients’ best interest.
Includes other new, broad exemptions. For example, the new principal transactions exemption also adopts a principles-based approach. And DOL is asking for comments on whether the final regulatory package should include a new exemption for advice to invest in the lowest-fee products in a given product class, that is even more streamlined than the best interest contract exemption.
Includes a carve-out from fiduciary status for providing investment education to IRA owners, and not just to plan sponsors and plan participants as under the 2010 proposal. It also updates the definition of education to include retirement planning and lifetime income information. In addition, the proposal strengthens consumer protections by classifying materials that reference specific products that the consumer should consider buying as advice.

Determines who is a fiduciary based not on title, but rather the advice rendered. The 2010 rule proposed that anyone who was already a fiduciary under ERISA for other reasons or who was an investment adviser under federal securities laws would be an investment advice fiduciary. Consistent with the functional test for determining fiduciary status under ERISA, the proposal looks not at the title but rather whether the person is providing retirement investment advice.
Limits the seller’s carve-out to sales pitches to large plan fiduciaries with financial expertise. This responds to comments that differentiating investment advice from sales pitches in the context of investment products is very difficult and, unless the advice recipient is a financial expert, the carve-out would create a loophole that would fail to protect investors.
Excludes valuations or appraisals of the stock held by employee stock ownership plans (ESOPs) from the definition of fiduciary investment advice. The proposed rule clarifies that such appraisals do not constitute retirement investment advice subject to a fiduciary standard. DOL may put forth a separate regulatory proposal to clarify the applicable law for ESOP appraisals.