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The Duty to Investigate

What will the fiduciary regulation require from investment advice fiduciaries?

While most of the requirements in the new fiduciary rule and exemptions are “old news” for retirement plan advisers, they may require significant changes for advisers to IRAs. In a recent blog post, ERISA attorney Fred Reish explains that those investment advice fiduciaries are required to investigate and evaluate investments, make recommendations and exercise sound judgment in the same way that knowledgeable and impartial professionals would.

To do that job, he notes that fiduciary advisers will need to gather the information necessary to make an appropriate recommendation and then prudently evaluate that information — a duty to investigate. Reish cites the DOL’s description of that responsibility in the preamble to the best interest contract exemption (BICE):

“This is not to suggest that the ERISA section 404 prudence standard or Best Interest standard, are solely procedural standards. Thus, the prudence standard, as incorporated in the Best Interest standard, is an objective standard of care that requires investment advice fiduciaries to investigate and evaluate investments, make recommendations, and exercise sound judgment in the same way that knowledgeable and impartial professionals would.”


Reish goes on to explain that the DOL has historically taken the position that a prudent process for advice to retirement plans must be documented, a stance he says “could easily be extended to advice to IRAs as well,” noting that there is a specific documentation retention requirement under the Best Interest Contract Exemption (BICE).

Secondly, Reish says there is an argument that if a fiduciary adviser cannot obtain – through the investigation – enough information to formulate a prudent recommendation, the adviser needs to abstain from making a recommendation, say when an adviser is developing a recommendation to a participant to take a distribution and roll it over into an IRA.

In that situation, Reish explains that the “BIC” specifically requires that the adviser consider the investments, expenses and services in the plan, and then compare them to the investments, expenses and services in the proposed IRA. That best interest analysis must be documented by the adviser, and if he/she cannot obtain adequate information about the investments, expenses and/or services in the plan, it would be difficult, if not impossible, to make and document that analysis, he says.

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