Recommending Contributions Not a Fiduciary Act, as Long as…

By ASPPA Net Staff • August 11, 2017 • 0 Comments
Is it a fiduciary act to recommend contributions, or a higher rate of contributions? The Department of Labor (DOL) recently provided some clarity in the frequently asked questions it issued on Aug. 3. The DOL says that doing so would not be deemed a fiduciary act “provided that the information and materials do not include recommendations with respect to specific investment products or recommendations with respect to investment management of a particular security or other investment property.”

A recent blog post by noted ERISA attorney Fred Reish elaborates on why the DOL’s statement is important. He notes that in the DOL’s request for information (RFI) on the fiduciary regulation, the DOL had asked: “Should recommendations to make or increase contributions to a plan or IRA be expressly excluded from the definition of investment advice? Should there be an amendment to the Rule or streamlined exemption devoted to communications regarding contributions? If so, what conditions should apply to such an amendment or exemption?”

Let’s face it, recommending a higher level of contributions — or even to contribute in the first place — could in some cases result in higher compensation to be paid to the adviser (or the adviser’s financial institution), and if so, Reish notes, the recommendation would result in a prohibited transaction.

The problems are obvious. Even though there is a potential conflict of interest where an adviser could make a little more money because of the increased contributions, the benefits to participants of increasing their retirement savings in plans and IRAs are meaningful. In that regard, it seems that public policy would favor increased contributions to IRAs and plans, even though there may be some minor benefit to the person making the recommendation.

Reish argues that such recommendations should not be viewed as a fiduciary act, that the “benefits of increased contributions are so obvious, and the potential conflict is so small” that what he finds to be the “easiest, and most direct, solution would be for the DOL to conclude that a recommendation to make or increase contributions is not fiduciary advice.” However, since the issue is raised as a question in the RFI, Reish says that if the Labor Department chooses not to exempt those recommendations, it should “…follow through with a favorable response to the second question” — basically in crafting a streamlined exemption for contribution recommendations that includes no, or no more than de minimis, requirements.

Else, he cautions that the rules would “likely create a trap for the unwary,” in that many advisers might not be aware of those additional requirements when recommending that a retirement investor save more in his or her IRA or plan.

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