How the Fiduciary Regulation Will Impact Recordkeepers

Most of the impacts of the fiduciary rule have naturally been on advisors – but there is also an impact on recordkeepers and the services they provide to plans and advisors.

In a recent blog post, noted ERISA attorney Fred Reish outlines some considerations.

Noting that the concept of financial wellness combines a focus on benefit adequacy with basic budgeting and financial management, Reish explains that it typically covers advice on plan participation, amounts to defer, repayment of indebtedness, budgeting and management of regular expenses, basic savings, investment advice and management of participants’ accounts, roll-ins to plans, and rollovers from plans. Moreover, he notes that where those recommendations constitute fiduciary advice under ERISA and the Best Interest Contract Exemption, the recordkeepers are accepting fiduciary status.

Reish also notes that the fiduciary rule includes an exception for investment services provided to “independent fiduciaries with financial expertise” (IFFEs), a category that includes broker-dealers, RIAs, banks and trust companies, and insurance companies. Where those financial institutions are willing to serve as fiduciaries with their advisors, recordkeepers can provide investment recommendations to the advisors without becoming fiduciaries – because, according to Reish, the financial institution and the advisors are considered to be independent and knowledgeable fiduciaries who can evaluate the recordkeeper recommendations on behalf of their plan, participant and IRA clients.

Finally, Reish notes that while recordkeepers have great flexibility to provide investment advice to advisors (who qualify as IFFEs – a provision that also applies to some larger plans) without becoming fiduciaries, the same is not true for advice to plan sponsors. Reish explains that there are some exceptions of general application for providing investment information to plan sponsors. The most useable exception is for responding to requests for proposals (RFPs) and requests for information (RFIs), Reish notes, though he cautions that even that exception is limited. “The investment list provided by the recordkeeper can only be based on the size of the employer or the size of the plan, or both,” Reish writes. “For existing plans, it could be based on the current investment lineup.”

Reish predicts that recordkeepers will increasingly take advantage of the IFFE carve-out, providing suggested investment lineups to qualifying IFFE advisors. “The advisor will then need to evaluate the lineup and decide whether to present it to the plan sponsor,” he notes, going on to state that “If an advisor then gives that investment lineup to the plan sponsor, the law will treat it as the advisor’s fiduciary recommendation (and, therefore, not as a recommendation by the recordkeeper).”

Reish says that is the only meaningful exception for individualized non-fiduciary investment recommendations by recordkeepers, and that while the RFP/RFI exception will also help, “it provides, by definition, (only) a generic list of investments.”

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