Safe Harbors and Exclusions in the DOL's Fiduciary Rule

W. Scott Simon is a principal at Prudent Investor Advisors, a registered investment advisory firm. He also provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. Simon is the recipient of the 2012 Tamar Frankel Fiduciary of the Year Award.

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We continue to take a deep dive into the Conflict of Interest Rule (Rule) promulgated by the U.S. Department of Labor on April 8, 2016.

Last month's column concluded with a framework to determine if an advisor is subject to the Rule. This month's column takes a closer look at the safe harbor exceptions/exclusions.

Some communications are not deemed by the Rule to be a “recommendation,” so they’re not “investment advice.”

These communications include (1) marketing or making available a platform, (2) general communications and (3) investment education. Let’s take a look at each.

Marketing or Making Available a Platform

A “person,” defined under the Rule as including a plan record-keeper, may market to a plan fiduciary its platform or make investment options available through its platform without being considered making a recommendation as long as:

• The person is independent of the plan fiduciary; • The person provides written disclosure that it's not providing impartial investment advice or fiduciary advice; and • The plan's individualized needs, its participants, or beneficiaries are not discussed.

However, the person is allowed to:

• Identify investment options that meet objective criteria set by a plan fiduciary--but it must disclose in writing any financial interest in the options; • Identify a sample list of investment options based on plan size or current options in response to an RFP--but it must disclose in writing any financial interest in the options; and • Provide to a plan fiduciary objective financial data and comparisons with independent benchmarks.

General Communications

The Rule allows furnishing or making available general communications that a reasonable person would not view as an investment recommendation such as:

• Remarks and presentations at widely attended speeches and conferences; • General circulation newsletters; • Talk shows; • Research or news reports prepared for general distribution; • General marketing materials; • General market data including data on market performance, market indices or trading volumes; • Price quotes; • Performance reports; and • Prospectuses.

Investment Education: Plan Information

The Rule allows delivery of certain investment education about a plan (similar to the current safe harbor Interpretive Bulletin 96-1) such as:

• Description of the terms or operation of the plan or IRA; • Information about the benefits of participation in the plan or increasing contributions to it; • The impact of pre-retirement withdrawals; • Advantages and disadvantages of different kinds of distributions from the plan; • Product features; • Investor rights and obligations; and • Information about the plan's fees and expenses.

Investment Education: General Financial, Investment, and Retirement Information

The Rule allows delivery of certain general financial, investment, and retirement information such as materials that don’t address specific investment products or investment options offered under a plan or IRA but which inform a plan fiduciary, plan participant or beneficiary, or IRA owner about:

• General financial and investment concepts; • Historic differences in rates of return between different asset classes based on standard market indices; • Effects of fees and expenses on rates of return; • Effects of inflation; • Estimating future retirement income needs; • Determining investment time horizons; • Assessing risk tolerance; • Retirement-related risks; and • General methods and strategies for managing assets in retirement.

Investment Education: Asset Allocation Models and Interactive Materials

Asset Allocation Models: The Rule allows delivery of certain information about asset allocation models but that must be based on generally accepted investment theories (such as modern portfolio theory) and historic asset class returns. The information must be accompanied by a statement that other assets, income and investments outside a model must be considered. There’s a strict requirement not to reference specific investment products when discussing IRAs.

Interactive Materials: The Rule allows certain questionnaires, worksheets, etc. that are provided to plan participants or IRA owners to assist in estimating income needs or retirement income streams, that take into account generally accepted investment theories and that use an objective correlation between asset allocation and income stream.

• Any material facts and assumptions must be provided by the participant or IRA owner, and accompany the materials; • Use of specific investment options must be provided by the participant or IRA owner; and • Asset allocation models and interactive materials must not reference specific investment options unless (1) investment options with similar risk/return trade-offs are identified and (2) a statement of how more information may be obtained must be provided.

Some Communications Are Not Deemed by the Rule To Be From a “Fiduciary” So They’re Not “Investment Advice”

Sellers to Sophisticated Investors: This exception/exclusion applies to advice provided by a seller of investment products to sophisticated fiduciaries of plans or IRAs such as banks, insurance carriers, RIAs, B/Ds, and any plan fiduciary independent of the seller that has at least $50 million in total assets under management (i.e., sophisticated investors).

• The seller must know or reasonably believe that the independent fiduciary can evaluate investment risks and may rely on written representations of same from the plan or fiduciary; and • The seller must "fairly inform" the independent fiduciary (1) that the seller isn't providing impartial investment advice or fiduciary advice and (2) any financial interest that the seller may have in the transaction. The seller may not receive a fee for providing investment advice in the transaction from the plan, independent fiduciary, plan participant or beneficiary, IRA or IRA owner.

Employees of Plan Sponsor: This exception/exclusion applies to advice provided by employees of a plan sponsor--acting in their capacity as employees--to a plan fiduciary, another employee or an independent contractor of the plan sponsor. This exception/exclusion (1) keeps investment education from becoming investment advice and (2) prevents employees from inadvertently becoming plan fiduciaries.

Advice from an HR Employee to a Co-Worker: This exception/exclusion applies if the HR employee (1) job description doesn’t include giving advice, (2) doesn’t receive any compensation more than normal pay and (3) is not licensed (or required to be licensed) under securities or insurance laws.

The author is a freelance contributor to Morningstar.com. The views expressed in this article may or may not reflect the views of Morningstar.