A Fiduciary Carve-Out Falls Short – for Recordkeepers

In his most recent blog post on the fiduciary regulation, Fred Reish notes a specific carve-out to the fiduciary definition – one that allows recordkeepers to provide lists of the investments available on their platforms that satisfy certain criteria specified by the plan sponsor; for example, performance, expense ratios, volatility, etc. Specifically, Reish, who has previously outlined a series of issues and opportunities for recordkeepers under the new fiduciary rule and the transition Best Interest Contract Exemption, says that this provision says that a recordkeeper does not become a fiduciary by:

“Identifying investment alternatives that meet objective criteria specified by the plan fiduciary (e.g., stated parameters concerning expense ratios, size of fund, type of asset, or credit quality), provided that the person identifying the investment alternatives discloses in writing whether the person has a financial interest in any of the identified investment alternatives, and if so the precise nature of such interest…”

Reish notes that there is a question as to whether plan sponsors who aren’t working with advisors have the ability to select appropriate criteria, though he acknowledges that the Labor Department permits recordkeepers to provide information to plan sponsors about generally accepted criteria. In that same vein, he notes that a Labor Department FAQ provides the ability for recordkeepers to use the criteria in an investment policy statement and provide the plan sponsor with the list that those criteria produce, without the recordkeeper becoming a fiduciary for that purpose. He goes on to explain that in those circumstances, the recordkeeper has to apply the criteria to all of the investments that are available on its platform and then report the results. Depending on the criteria selected by the plan sponsor, he writes, the result could be a list of just a few funds or a list of hundreds of funds.

If the recordkeeper further winnows the list of investments produced by the application of the generally accepted criteria or the IPS criteria, Reish notes that that would make the recordkeeper an investment fiduciary, quoting the Labor Department:

“…communication could constitute an investment recommendation for purposes of the Rule if a reasonable person would view the communication as a recommendation that the fiduciary choose investments from the selective menu screened by the recordkeeper.”

Reish concludes that this carve-out may not be particularly helpful, since recordkeepers cannot provide selective lists without running the risk of becoming fiduciaries. As a result, Reish says, recordkeepers that don’t want to be fiduciaries are likely to provide investment lineups to advisors through wholesalers and via responses to RFPs and RFIs.

Post a Comment

Your email is never published nor shared. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

Send this to a friend