What New Disclosure is Required During the Transition Period?

The ERISA consultants at the Learning Center Resource Desk, which is available through Columbia Threadneedle Investments, regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with an advisor in Pennsylvania is representative of a common inquiry regarding the transition period for the new investment advice fiduciary rules. The advisor asked:

“Our firm will be following the Best Interest Contract Exemption (BICE) under the new investment advice fiduciary rules. Our compliance department has provided a written notice of fiduciary status for us to use with our clients during the transition period that runs through Dec. 31, 2017. Is this notice required?

No, the written statement of fiduciary status is no longer required during the transition period. This is a recent change that was included in the regulation that delayed the applicability date of the new fiduciary rules to June 9, 2017 (DOL Reg. 2510.3-21).

The DOL changed the BICE and Principal Transaction Exemption transition period requirements, making adherence to the Impartial Conduct Standards (that is, act in the client’s best interest, receive only reasonable compensation and make no materially misleading statements) during the transition period (June 9, 2017 through Dec. 31, 2017) the only condition of compliance (removing the need to provide a written statement of fiduciary status as well as other requirements).

However, service providers to qualified plans may still be required to provide an updated service and fee disclosure under ERISA §408(b)(2) to reflect a change in fiduciary status as of June 9, 2017.

Pursuant to DOL Reg. § 2550.408b-2(c)(1)(iv), covered service providers to qualified retirement plans (e.g., 401(k) plans) who expect to receive at least $1,000 in direct or indirect compensation must provide plan fiduciaries with service and fee disclosures. As part of the “408b-2” disclosure, service providers must include a statement of fiduciary status, if applicable [DOL Reg. § 2550.408b-2(c)(1)(iv)(B)].

Therefore, if a financial advisor’s status as a fiduciary to the plan changes as of the applicability date (June 9, 2017) of the investment advice fiduciary regulations, then he or she is required to provide an updated disclosure to the plan fiduciary reflecting the change in his or her fiduciary status.

The updated 408b-2 disclosure must be provided “as soon as practicable, but not later than 60 days from the date on which the covered service provider is informed of such change” [DOL Reg. § 2550.408b-2(c)(1)(v)(B)]. Consequently, financial advisors should provide the notice by June 9, 2017 and no later than August 8, 2017.

Conclusion

Financial advisors should be aware that they may need to issue updated 408b-2 disclosures during the BICE and Principal Transaction Exemption transition period.

The Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC (RLC), a third-party industry consultant that is not affiliated with Columbia Threadneedle. Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Columbia Threadneedle does not provide tax or legal advice. Consumers consult with their tax advisor or attorney regarding their specific situation.

Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Columbia Threadneedle.

Columbia Threadneedle Investments (Columbia Threadneedle) is the global brand name of the Columbia and Threadneedle group of companies.

©2017, Columbia Management Investment Advisers, LLC. Used with permission.

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