Experts dissecting fiduciary rule's carve-outs

Defined contribution industry participants are paying close attention to the carve-outs — exemptions distinguishing non-fiduciary behavior from fiduciary behavior — in the Labor Department's fiduciary rules proposed last month.

Key issues addressed by the exemptions for defined contribution plans include financial education and the role of certain employees working with DC plan fiduciaries, ERISA attorneys and benefits consultants say.

Reactions to the carve-outs range from concern to uncertainty to relief.

“Overall, I think the carve-outs are helpful,” said Julia Zuckerman, director in the compliance consulting center of Buck Consultants in Washington.

However, Ms. Zuckerman and others interviewed for this story said the Labor Department's proposal covering the difference between non-fiduciary financial education and fiduciary-related financial advice could be troublesome for plan officials and participants.

The good news, the attorneys and consultants say, is that the DOL's proposed exemptions for education are similar to those the agency issued 19 years ago. The bad news is that the DOL proposal adds a passage that increases the scope of fiduciary standards for sponsors' communication to participants.

Unlike the longstanding guidance, the proposal makes a distinction between DC plan communications that describe generic investment information and asset allocation models that refer to specific investment products in the DC plan. Under existing guidance, the latter wouldn't be subject to a fiduciary standard. Under the DOL proposal, however, combining general-investment and specific-product information in the plan would fall under the umbrella of fiduciary behavior.

The DOL proposal “puts a roadblock on sponsors' education efforts,” Ms. Zuckerman said.

“Some financial education connects the dots between the generic and the specific in the plan,” added Marjorie Martin, a principal in the compliance consulting center at Buck Consultants“This takes that away. It's a negative for participants.”

Ms. Martin and Ms. Zuckerman noted the proposed rule doesn't prevent DC plans from making those connections — just that such an approach would be viewed as a fiduciary act. One way to avoid this dilemma is to provide separate sets of information — one document that describes general investing strategies and another that discusses options offered by the plan.

If DC plan communications describe an asset allocation model with specific asset classes, that wouldn't be considered a fiduciary situation under the proposed rule, Ms. Zuckerman said. However, describing the model with specific product choices available within a plan would make this information a fiduciary event.

“In the new regulatory world, a lot of investment education could be viewed as fiduciary activity,” said Adam Cohen, a Washington-based partner in the law firm of Sutherland Asbill & Brennan LLP. “It may have less utility for participants. It could make it more difficult to provide investment education.”

Although financial education and certain plan employees are exempt from being considered fiduciaries under the proposed rule, Labor Department officials decided against making a special exemption for call-center employees. “Such a carve-out would be inappropriate,” the DOL said in its proposed rule document. The exemption covering financial education “provides guidelines under which call center staff ... may avoid fiduciary status.”

This proposal regarding call-center employees is provoking “robust discussion” within the retirement industry, said Jennifer Eller, a principal at Groom Law Group, Washington. “The department says the education carve-out is good enough.”

Another carve-out in the DOL's proposal covers DC plan employees who may provide advice but who aren't compensated for the advice beyond their normal pay. ERISA attorneys say this provision would affect, for example, human resources employees who provide routine reports to plan fiduciaries.

“The department is giving comfort to that group of employees, so it's a good thing,” said Russell Hirschhorn, a New York-based senior counsel for law firm Proskauer Rose LLP.

Some ERISA attorneys said the DOL must provide more clarification on this carve-out. The goal is to guard against a human resources employee from becoming an “inadvertent fiduciary,” said Mr. Cohen of Sutherland Asbill & Brennan.

What happens, for example, if an employee nearing retirement calls an HR representative seeking information about rolling over his or her assets, taking a distribution, or keeping the money in the plan, he asked. Answering these questions might be considered a fiduciary act under the proposed rule even though the answer isn't specific investment advice, Mr. Cohen said.

“Today, it is not considered a fiduciary activity, but it could be under the proposed rule,” Mr. Cohen said. If so, “there could be limitations on HR employees discussing distribution choices.”

“I believe it is helpful for plan sponsors when DOL can provide clarity on when individuals are acting in a fiduciary capacity or not, regardless of whether any prohibited transaction concerns are raised,” Marla Kreindler, a Chicago-based partner at law firm Morgan Lewis & Bockius LLP, wrote in an e-mail. “Even if the employee isn't receiving compensation beyond normal compensation, knowing whether an employee is acting in a fiduciary capacity can be important when thinking about fiduciary liability insurance coverage, corporate indemnifications and similar matters.”