A provision in the DOL’s 2015 proposed fiduciary rule that would have had a significant impact on participant education has been modified – in line with recommendations made by NAPA and the American Retirement Association.
In the final fiduciary regulation, the DOL says that in response to comments on the 2015 proposed rule, the final rule allows educational asset allocation models and interactive investment materials provided to participants and beneficiaries in plans to reference specific investment alternatives “under conditions designed to ensure the communications are presented as hypothetical examples that help participants and beneficiaries understand the educational information and not as investment recommendations.”
What are those conditions? Well, as it turns out, they are exactly what the American Retirement Association comment letter asked for – specifically, if four conditions are met:
- the alternative is a designated investment alternative (DIA) under an employee benefit plan;
- the alternative is subject to fiduciary oversight by a plan fiduciary independent of the person who developed or markets the investment alternative or distribution option;
- the asset allocation models and interactive investment materials identify all the other designated investment alternatives available under the plan that have similar risk and return characteristics, if any; and
- the asset allocation models and interactive investment materials are accompanied by a statement that identifies where information on those investment alternatives may be obtained.
IRAs Not Included
The rule does not, however, create such a broad safe harbor from fiduciary status for such “hypothetical” examples for IRAs. The DOL noted that in an ERISA plan context, a separate fiduciary is responsible for overseeing and ensuring the prudence of the funds on the plan menu – an oversight structure that it said IRAs currently lack.
The DOL’s 2015 proposed rule sought to make some shifts in the line between education and advice, notably by categorizing any specific fund references in education materials to be advice, not education, including those ubiquitous pie charts that illustrate differences in asset allocation models by showing the proportion of those funds that could be represented by representative funds on the menu.
In its commentary explaining the fiduciary regulation’s impact on investment education, the DOL seemed to think that the concerns raised about what the 2015 proposal described as an education “carve out” were overblown (apparently including their characterization as a “carve out” – the final regulation not longer refers to the education provisions with that label). Indeed, the commentary in the final regulation takes pains to emphasize how consistent the DOL felt the fiduciary regulation – both in its proposed and final form – was with DOL Interpretative Bulletin 96-1, which has established the demarcation between investment education and advice since its issuance in June 1996.
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In the final regulation, however, the DOL acknowledged the “one substantive change” the proposed regulation had made – and that the final regulation backed away from: not allowing asset allocation models and interactive investment materials to identify specific investment alternatives and distribution options unless they were affirmatively input into those models by the participant/investor. This was a significant shift from established practice, and one that the American Retirement Association and NAPA challenged, both in comments on the proposed rule and in testimony at the DOL’s August 2015 hearing on the rule. And the final regulation, as noted above, reverses the position taken in the 2015 fiduciary proposed rule – a significant win for participant education.
The DOL notes that the final rule is intended to reflect its “continued view that the statutory reference to ‘investment advice’ is not meant to encompass general investment information and educational materials, but rather is targeted at more specific recommendations and advice on the investment of plan and IRA assets.” However, in view of the questions they received on the matter, DOL regulators decided to add text to the final regulation to clear things up.
The final rule defines a variety of investment education activities that fall short of fiduciary conduct and makes it clear that advisors do not act as fiduciaries merely by recommending that a customer hire them to render advisory or asset management services. It also expressly provides that investment advice does not include communications that a reasonable person would not view as an investment recommendation, including general circulation newsletters; television, radio, and public media talk show commentary; remarks in widely attended speeches and conferences; research reports prepared for general circulation; general marketing materials; and general market data.
The final rule expressly describes four broad categories of non-fiduciary educational information and materials:
- Plan information
- General financial, investment, and retirement information
- Asset allocation models
- Interactive investment materials
Fiduciary Obligation to Review
A final note: The fiduciary regulation cautions that it is important to emphasize that under ERISA’s obligation to monitor plan service providers, a responsible plan fiduciary would have an obligation to evaluate and periodically monitor the asset allocation model and interactive materials being made available to the plan participants and beneficiaries as part of any education program.
The rule explains that this should include an evaluation of whether the models and materials are, in fact, unbiased and not designed to influence investment decisions toward particular investments that result in higher fees or compensation being paid to parties that provide investments or investment-related services to the plan. In this context and subject to the conditions above, according to the final rule, “the Department believes such a presentation of a specific designated investment alternative in a hypothetical example would not rise to the level of a recommendation.”