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What Plans do the Final DOL Fiduciary Rule and its Exemptions Cover?

Diane Capone

This question is important for financial advisers in order to understand how the new regulations affect their business. This article is not meant to give you a full understanding of the regulation and all of its requirements but more narrowly to give some background and to identify the various types of plans that are covered. Initial reactions have been positive and the provisions less burdensome than in the previously proposed rule. The regulation and related prohibited transaction exemptions are very broad and will affect — to some extent — the way you do business.

First if all, you are a fiduciary if you make a recommendation regarding a covered plan and you receive compensation in connection with the recommendation. Recommendations include advising a participant to take a distribution or rollover to an IRA as well as giving advice on investments. Once you are a fiduciary you have a fiduciary duty to the participant or the plan, including avoiding conflicts of interest and receiving only reasonable compensation. The Department of Labor (DOL) provides a number of prohibited transaction exemptions (PTEs) that financial advisers can use in order to work with retirement plans and participants and to receive compensation. The PTE that you hear about most often is the Best Interest Contract Exemption (BICE), which permits otherwise prohibited compensation if you are in compliance with the conditions of the BICE.

So, with that very brief background let’s look at the plans this regulation covers. While we know that governmental 403(b) plans and governmental 457 plans are not directly covered by this regulation, it is important to note that if you are providing advice to participants to roll over from these plans to an IRA, you will need to understand how the rules apply.

The regulation covers the following retirement plans:

1. all employer plans subject to Title I of ERISA such as:

  • 401(k);
  • defined benefit;
  • profit sharing;
  • ERISA 403(b), and
  • other 401(a) plans.
2. All plans otherwise included in Internal Revenue Code Section 4975, such as:

  • traditional IRA accounts and annuities;
  • Roth IRAs;
  • Archer medical savings accounts;
  • health savings accounts;
  • Coverdell education savings accounts;
  • SEP IRAs;
  • SIMPLE IRAs; and
  • all 401(a) plans, including church plans, governmental plans and one-participant 401(k) plans.
The new regulation does not cover the following:

  • non-qualified investment or brokerage accounts; and
  • 403(b) plans that are not subject to ERISA (i.e. governmental plans, church plans, and elective deferral-only plans), and Governmental 457 plans; note, however, that rollover IRAs from these plans could be covered.
As many have pointed out, it will take time to review the regulation and the PTEs which were published on April 10, 2016. It will take time until all of the nuances have been identified and the path forward is determined. The DOL has provided a year (April 10, 2017) before it is in full effect and extra time for full compliance with the PTEs (Jan. 1, 2018). You should expect to hear from your product and investment providers once the regulations have been analyzed, and decisions on how to proceed are made.

The essence of these rules is to help protect participants in retirement plans and IRA investors by making financial advisers accountable for acting in their client’s best interest. DOL retained this general principle while they also listened to concerns of financial advisers and the industry. As time goes on, we will see how the industry provides for compliance with the regulations.

Diane D. Capone, CEBS CPE-Compliant, TGPC is a Sr. Retirement Compliance Consultant for Lincoln Investment, Registered Investment Advisor, Broker/Dealer, Member FINRA/SIPC

Please note that this article is for general informational purposes only and is not intended to be taken as legal advice or a recommended course of action in any given situation. Readers should consult their own legal advisor before taking any actions suggested in this article.

Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA, or its members.