What Companies Should Know About Employees’ New Retirement Plan Protections

May 26, 2016

Financial planning is kind of like healthy eating: for a lot of people, they love the potential results, but the thought of doing the work at the outset to get the process moving is painful. Not only does it take sacrifice and the prioritization of long-term benefits over short-term satisfaction, getting started is simply confusing. When you see new headlines every day with contradictory advice about what’s beneficial and what was once considered beneficial but is now considered downright terrible, and when allegations of conflict of interest against those providing “recommendations” abound (e.g. those recommendations are motivated by high commissions and kickbacks), consumers are justifiably confused and don’t know who to trust. And yet we all want to live long, healthy lives, with enough in our retirement funds to fund those long lives, so we depend on the advice of others in both areas.

While food labeling law is a hot-button issue in litigation these days, this week we will focus on new law protecting Americans’ financial health into their retirement. Last month, the Department of Labor (DOL) released new rules which will impact financial advisers who recommend investments for retirement accounts, which are among the most significant financial assets that most American workers own.  These rules impose a new, wide-ranging fiduciary duty on such financial advisers and mandate increased transparency regarding the financial arrangements that such advisers have, including fees and commissions they receive. Below, we’ll get into what the DOL’s new rules require and how your company is affected by them.

Retirement Plan Financial Advisers Now Have a Fiduciary Duty

You may be wondering why the DOL, as opposed to the Securities and Exchange Commission, is issuing these rules. The answer has to do with the huge shift over the past four decades in individual investments from traditional stock purchases made directly through stockbrokers to employer-sponsored retirement plans, specifically 401(k) plans and IRAs. Under ERISA (the “Employee Retirement Income Security Act”), passed in 1974, the DOL has power to regulate how such retirement plans are managed and funded. In announcing the rules, the DOL noted that the financial adviser rules had not been updated much since the mid-1970s, a time when 401(k) plans did not yet exist and IRAs had just been introduced.

With the new rules, the DOL has imposed a fiduciary duty on all financial advisers making recommendations about investments in 401(k)s and IRAs that they act in the best interest of their clients. What this means is that these financial advisers cannot advise a person to make an investment based on the fact that the adviser will receive a commission or other compensation on the purchase, but rather the advice must be rooted in a belief that the investment  will benefit the customer over alternative options. As the DOL states, advisers must now put their “clients’ best interest before their own profits.”

To understand what this fiduciary duty means, think of a car salesman. That salesman’s only interest is in selling you a car and getting a commission, and the law imposes no fiduciary duty on her to sell you a car that actually is in your best financial interests over her own. That is not the case now with financial advisers making recommendations for retirement plans. While a financial adviser can of course receive commissions and other compensation for selling an employee on a financial recommendation, what this new rule makes clear is that the motivation to obtain those benefits cannot take precedence over the best interests of a client, and that disclosure requirements will be imposed if the adviser expects to make a commission.

So Who is a Financial Adviser and What is a Recommendation?

The term “financial adviser” has taken on a pretty loose definition in our society, with pretty much anyone being able to employ that title, and the new rules reflect that vagueness. Under the rules, whether a fiduciary duty exists is not based on the title of the adviser, but rather on 1) the type of relationship that the adviser has with the buyer and 2) whether a “recommendation” has occurred.

Whether a recommendation has occurred is a slightly more straightforward analysis, so let’s begin there. According to the DOL, a  “recommendation” occurs where there, “is a communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action.” The courses of actions included within the scope of recommendations include communications to a plan, plan fiduciary, plan participant and beneficiary and IRA owner relating to:

  • the advisability of buying, selling, or holding an investment in a 401(k) or IRA
  • rollover options from a 401(k) or IRA
  • suggestions regarding general investment strategies or policies or portfolio compositions for a 401(k) or IRA
  • selection of other persons to provide such recommendations or management

The above provides the substantive content of what constitutes a recommendation, but the question remains regarding which people providing such recommendations will actually be considered to have the new fiduciary duty. First, if an adviser acknowledges or represents that she has such a duty under ERISA or the Internal Revenue Code, then she has the duty. Second, if the adviser has a written or oral agreement with the listener that he is providing financial advice specific to the listener’s needs, then the duty arises. Finally, if the adviser directs the above recommendations to a specific recipient “regarding the advisability of a particular investment or management decision with respect to securities or other investment property of the plan or IRA,” then the duty also arises.

That last category seems broad indeed, but the new rules provide specific carve-outs to say what is not covered by the new rules, meaning no fiduciary duty is imposed. Those types of communications and/or relationships that specifically do not impose a fiduciary duty include:

  • Persons providing “education” about investment options as opposed to recommendations
  • General communications sent to a general audience (e.g. newsletters, TV show appearances, seminar appearances, etc.)
  • “Platform providers” – meaning third-party providers that present a host of alternative investment options on their platform – which provide communications about investment options
  • Employees of companies offering sponsored plans who provide reports and information to company employees (more on this below)

Financial Advisers Face Increased Transparency Requirements

Beyond the fiduciary duty imposition, the new rules require that any covered financial advisers receiving commission-based payments in connection with the sale of investments must comply with a “Best Interest Contract Exemption” in order to properly receive the payments. First, the adviser must disclose to the customer that the fiduciary duty exists and must create policies and procedures to mitigate potential conflicts of interest. The adviser must also proactively make disclosures to the customer regarding:

  • descriptions of material conflicts of interest;
  • fees or charges that the investment customer will be paying to the adviser; and
  • descriptions of the “types of compensation” that the adviser expects to receive from third parties in connection with recommended investments

While those are the mandated disclosures, customers can demand even more disclosures from the investment under the new rule, including disclosures of the specific costs, fees, and compensation associated with any transaction.

Although the new fiduciary duty and disclosure rules do appear at first glance to require significant efforts on the parts of advisers, the reaction from the investment community has generally been positive, with numerous large investment advisers applauding the DOL’s willingness to work with the industry in creating flexible rules which do not limit investment options, and an appreciation that consumers will benefit from the increased disclosure.

How Are Companies and HR Departments Affected By the New Rules?

Companies that offer retirement plan options to their employees should not face heightened liability or significant new requirements under the new rules. Furthermore, the new rules can offer companies and HR departments a timely reason to talk about retirement planning options and to assuage concerns that employees have about trusting financial advisers and the concept of entering into the financial markets in general.

First off, as mentioned above, the new rules specifically state that any company employees who work in providing information and recommendations about retirement plan options to other employees (whether they are in the company’s payroll, accounting, HR, or financial departments) will not be considered financial advisers subject to the rule, so long as they receive no fee or other compensation in connection with the recommendations beyond their normal compensation, and they are not registered or license advisers.

Thus, HR and other company employees can freely talk with employees about retirement planning options without the imposition of a fiduciary duty. Furthermore, the new rules can even be a conversation-starter or way to ease employee concerns that they are going to hand over their money based on financial adviser recommendations that don’t have their best interests in mind. One of the major reasons employees don’t invest in the stock market is that they don’t trust stock brokers and financial advisers.  Although there may be legitimate examples of wrongdoing in the news that support such mistrust, the new rule can provide comfort to employees that they now have increased protections from financial advisers as well as transparency regarding the financial arrangements that may affect the advice they receive.

Getting more employees involved in employer-sponsored retirement funds and improving their trust in such plans is not just a nice thing to do on behalf of employees — it’s a huge aspect of hiring and retaining your best employees, and one that continues to grow in importance as workers become worried about their financial futures. One recent study made the following findings about workers’ value of company retirement plans:

  • Between 2009 and 2011, workers under 40 who placed a high importance on retirement plans in choosing a job rose from 28% to 63%.
  • Over 75% of newly hired employees at companies with company-sponsored defined benefit retirement plans indicated they wanted to stay at the company until they retire.

The regulations will not be fully implemented until 2018, which should give investment advisers, companies, and employees plenty of time to educate themselves on the implications and opportunities that the new rules provide.



Jeremy Masys


Jeremy Masys is a writer, attorney, and musician living in Los Angeles. He earned his JD at New York University School of Law and attended USC's School of Cinematic Arts as an Annenberg Fellow. Jeremy has practiced white collar defense law in New York and Los Angeles.

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