Introduction DOL Fiduciary Proposal ∙ Broadens scope of advisors deemed to be fiduciaries Agenda ∙ Existing Rule ∙ Proposed Fiduciary Definition and Exemptions.

Introduction• DOL Fiduciary Proposal

∙ Broadens scope of advisors deemed to be fiduciaries

• Agenda ∙ Existing Rule ∙ Proposed Fiduciary Definition and Exemptions ∙ Proposed Carve-Out for Investment Education ∙ Impact of DOL Proposal on IRA Markets

Existing ERISA Fiduciary Definition• ERISA Fiduciary Status of Advisor

∙ Triggered if “investment advice” is provided for compensation

• Existing Definition of “Investment Advice” (5-Prong Test)∙ Recommending plan investments∙ Regular basis∙ Mutual understanding∙ Primary basis for plan’s decisions∙ Individualized to plan’s needs

Proposed Fiduciary Definition• Fiduciary Status

∙Covers persons providing “investment advice” for compensation• New 4-prong definition for “Investment Advice”

∙Making covered recommendations- recommending investments (including rollovers) - recommending investment managers, - giving appraisals, or - recommending other advisors who do any of above

∙ Understanding (does not need to be mutual)∙ Individualized or specifically directed to retirement client∙Considered by client (even if not primary basis for decision)

Carve-Outs and Exemptions• 6 Carve-Outs from definition of Fiduciary

∙ Includes carve-out for Investment Education• New exemptions allows fiduciary to receive variable compensation

∙ BIC Exemption - Written contract with mandatory terms

- Comprehensive disclosures - Range of investments (reasonably necessary asset classes) - Advice limited to covered investment products only∙ Higher compliance costs may encourage advisors to stop serving

retirement clients or migrate to asset-based fee model

Investment Education• Current safe harbor (IB 96-1) covers 4 categories

∙ Plan Information∙ General Financial/Retirement Information∙ Asset Allocation Models∙ Interactive Investment Materials

• Observations∙ Applies only to plan participants∙ Asset allocation models and interactive materials may refer to plan’s investment options but must indicate existence of alternatives

New Carve-Out for Investment Education• Covers same information categories as current safe harbor

∙ Plan Information∙ General Financial/Retirement Information∙ Asset Allocation Models∙ Interactive Investment Materials

• Differences∙ Expanded to include retirement income guidance∙ Applies to plan and IRA clients, as well as plan participants

∙ Asset allocation models and interactive materials may not refer to plan’s investment options but must indicate existence of alternatives∙ Must avoid recommending specific investment products

Computerized Advice• Computer Model Safe Harbor

∙ Allows receipt of variable compensation∙ Model must be expert-certified∙ Advice arrangement must be audited annually∙ Model must utilize participant data

• Computerized asset allocation by third parties∙ Enables advisor to avoid fiduciary status∙ More freedom fro rollover services

Capturing Rollovers• Issues arising from cross-selling

∙ Potential conflicts of interest- Advisor develops relationships with plan sponsor

and participants

- Exploiting trust to sell at unfavorable terms∙Potential conflict if advisor’s fees on rollover assets are higher than fees on plan assets

DOL Rollover Opinion• Advisory Opinion 2005-23A

∙ Broadly suggests that if an advisor is a fiduciary, any rollover advice to participants may trigger PT∙ If advisor is not fiduciary, rollover advice will not trigger PT

∙ Advisor accepting fiduciary status cannot capture rollover assets, unless acting in separate non-fiduciary capacity

∙ Advisor providing “accidental” fiduciary advice becomes a fiduciary and is subject to restrictions of the Rollover Opinion • Proposed definition of fiduciary advice includes rollover recommendations

Effect of Fiduciary Proposal on Rollovers• Impact on Advisory Opinion 2005-23A

∙ If adopted, the DOL fiduciary proposal would replace current guidance under Advisory Opinion 2005-23A∙ As proposed, any rollover advice would be fiduciary advice∙ Non-fiduciary advisors providing rollover advice would automatically become plan or IRA fiduciaries

• Relief under Proposed Exemptions∙ Would give advisors ability to provide rollover advice and earn higher rates of compensation on rollover IRA assets∙ Proposed exemptions entail numerous requirements

Protective Measures (BIC)• BIC Exemption protection for IRA rollovers

∙ Written contract requirement- Timing: before recommendation- Best interest standard- Policies mitigating effects of differential compensation

∙ Disclosures- Pre-transaction chart for compensation- Annual fee activity

Protective Measures (PTE 84-24)• PTE 84-24

∙ Generally applies only to insurance products and mutual funds

∙ Not available for certain rollovers- Mutual funds- Annuities treated as securities (variable

annuities)∙ No written contract or conflicts policies∙ Adherence to best interest standard required

DOL’s Fiduciary Rule & Rollovers

Marcia S. Wagner, Esq.99 Summer Street, 13th Floor

Boston, MA 02110(617) 357-5200

[email protected]

A0176218.PPTX