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Level Fee Fiduciary – Past and Future

The label “Level Fee Fiduciary” has been used for many years with one meaning, but the Best Interest Contract (BIC) Exemption has used it for a different purpose and, depending on your reading, a different definition, writes Fred Reish.

The Traditional Definition

In a recent blog post, Reish notes that historically, Level Fee Fiduciary referred to a fiduciary adviser whose compensation was level or, at least, levelized. “Level” refers to an adviser who has a stated fee, for example, 1% per year, and does not receive any other payments, while “Levelized” refers to a fiduciary adviser who has a stated fee (e.g., 1%), but who receives payments from third parties as a result of the recommendations – and then levelizes those payments by offsetting them dollar-for-dollar against the 1% fee. In both of those cases, the advisers receive no more, nor any less, than the 1%, and Reish explains, based on two DOL advisory opinions, the offset method works to, in effect, create a level fee.

Reish explains that in those two situations the advisers are not committing a prohibited transaction in either of these cases. As a result, the advisers do not need an exemption, or exception, from a prohibited transaction. That’s the first use.

The Second Type

Enter the BIC, which used “Level Fee Fiduciary” in a different setting. In BIC – a prohibited transaction exemption, and one that only applies to three scenarios:

  1. a recommendation to take a distribution from a plan and roll over to an IRA with the adviser;

  2. a recommendation to transfer an IRA to the adviser; and

  3. a recommendation to switch “qualified money” from a commission-based account to a fee-based account.

Reish explains that each of those three recommendations will result in a prohibited transaction if the adviser receives more compensation if the retirement investor accepts the recommendation. Needless to say (though Reish points it out), an adviser will almost always make more money (with the possible exception of the case where the adviser is charging the same fee in the IRA as the adviser charged for services to the plan).

For the BICE provisions on these three scenarios (which is sometimes referred to as “BIC-lite”), the definition of “Level Fee Fiduciary” is:

A Financial Institution and Adviser are ‘Level Fee Fiduciaries’ if the only fee received by the Financial Institution, the Adviser and any Affiliate in connection with advisory or investment management services to the Plan or IRA assets is a Level Fee that is disclosed in advance to the Retirement Investor. A ‘Level Fee’ is a fee or compensation that is provided on the basis of a fixed percentage of the value of the assets or a set fee that does not vary with the particular investment recommended, rather than a commission or other transaction-based fee.

Reish explains that, in and of itself, that definition could mean either: (1) that no other payments can be received by the adviser; or (2) that the adviser could receive other payments so long as they were not on top of, or in addition to, the stated fee (that is, it would be permissible if the additional payments were offset dollar-for-dollar, such that they did not increase the fee).

Unfortunately, Reish notes that at least one senior DOL official has said that the Department intended for the language to mean that no additional payments could be received regardless of whether they were offset or not – though he cautions that the statements of individual DOL employees are not considered to be legal authority. That, of course, is the second use.

The Third Type

The third use of the concept of Level Fee Fiduciary is found in the Pension Protection Act “level fee” exemption, though that involves an entirely different situation. In that case, if the conditions of the exemption are satisfied, an organization can commit a prohibited transaction, so long as the advice is provided by a separate unit that receives only level fee compensation for providing the advice.

So, there are the three scenarios in which an adviser could be labeled as a Level Fee Fiduciary. But, as Reish notes, the definitions, requirements for compliance and the compensation considerations are different for each of the scenarios.