The U.S. Department of Labor has released its package of proposed changes to the regulation defining fiduciary advice and to the exemptions for conflicts and compensation for investment advice to plans, participants (including rollovers), and IRAs (including transfers).

My last post, The New Fiduciary Rule (7), discuss the “non-discretionary” definition of fiduciary investment advice in the DOL’s proposed fiduciary regulation. The other two definitions of fiduciary status are covered by my posts The New Fiduciary Rule (5) and The New Fiduciary Rule (6).

The proposed definition of non-discretionary fiduciary advice is a material change from the current regulation because it eliminates the 5-part test, including the requirement that advice be given to the particular retirement investor on a “regular basis.” In other words, a one-time recommendation can be fiduciary advice under this definition. (The definition is somewhat more demanding that just “one-time advice,” but I will refer to it as one-time advice for purposes of this article. If you want to know more about the detailed definition, look at my last post.)

Here are some additional thoughts about the proposed fiduciary definition and how it will apply if finalized.

Robo Advice Would be Permitted

PTE 2020-02 provides relief for prohibited transactions resulting from non-discretionary investment advice, but only if its conditions are satisfied.

However, the current version of PTE 2020-02 does not cover robo advice. Stated differently, if robo advice causes a prohibited transaction (e.g., recommending proprietary products or receiving revenue sharing as a result of investment recommendations), the PTE does not provide relief and, as a practical matter all compensation (e.g., management fees and revenue sharing) would be prohibited (unless another exemption was available).

Specifically, the current PTE 2020-02 says, in its preamble:

Section I(c)(2) of the exemption excludes from relief transactions that result from investment advice generated solely by an interactive website in which computer software-based models or applications provide investment advice that do not involve interaction with an Investment Professional (referred to herein as ‘‘pure robo- advice’’). ‘‘Hybrid’’ robo-advice arrangements, which involve both computer software models and personal investment advice from an Investment Professional, are permitted under the exemption.

On the other hand, the preamble to the proposed fiduciary regulation says:

The proposed amendments to PTE 2020–02 expand the scope of the exemption to cover…transactions involving ‘‘pure’’ robo-advice providers.

This will be discussed in more detail in articles about PTE 2020-02. However, for now, the key point is that, if an entity provides robo investment advice that constitutes non-discretionary fiduciary advice under the proposed definition, the entity will be a fiduciary for purposes of ERISA and the Code. After all, there needs to be a fiduciary in order to have fiduciary advice. However, if the fiduciary advice does not result in a financial conflict (that is, a prohibited transaction), the fiduciary adviser (e.g., the entity) will not need the protection of a prohibited transaction exemption. So, in that case, robo investment advice to private sector retirement plans and their participants will be fiduciary advice subject to ERISA’s prudent man rule and duty of loyalty, but the protection of a PTE will not be needed. On the other hand, non-conflicted “fiduciary” advice to an IRA will not be subject to those standards, but instead the firm’s advice will be governed by the firm’s regulator, for example, the best interest standard for broker-dealers under Reg BI.

Investment Education

In 1996, the DOL defined investment education in its Interpretive Bulletin 96-1. Since then it has been relied on my many plan sponsors and service providers as a way to avoid fiduciary status while providing investment education to participants. In the preamble to the fiduciary proposal, the DOL says that it continues to abide by IB 96-1 (and suggests that it may be willing to expand it):

If the proposed rule is finalized, the IB would continue to correctly describe the types of educational information and materials that should not be treated as ‘‘recommendations’’ subject to the fiduciary advice definition. Although the IB specifically applies in the context of participants and beneficiaries in participant-directed individual account plans, the Department believes that the analysis it presents is valid regardless of whether the retirement investor is a plan participant, beneficiary, IRA owner, IRA beneficiary, or fiduciary.

In fact, the preamble suggests that the DOL is taking a more relaxed view of education when it comes to recommending increases in deferrals:

One important example of investment education is the provision of information about the benefits of increasing contributions to an employee benefit plan. Under IB 96–1, the provision of information on ‘‘the benefits of plan participation’’ and the ‘‘benefits of increasing plan contributions’’ are both examples of ‘‘plan information.’’ The Department confirms that, for purposes of the proposal, the provision of such information would not trigger fiduciary status.

So investment education, including information about contributions, continues to be alive and well under the DOL’s proposals. While there are changes in the proposals to be worried about, this is not one of them.

Concluding thoughts

The fiduciary and PTE proposals included hidden nuggets, often in the preambles. From time to time as I write these articles I will talk about some of those hidden opportunities and traps.