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Prohibited Transactions for Fiduciaries After DOL Rule Change

Posted by Paul D. Woodard | Jun 27, 2017

Starting June 9, 2017, the transition period for the new Department of Labor fiduciary rules began, with full implementation by January 1, 2018. A primary component of the new fiduciary rules is the Best Interest Contract Exemption (BICE), which allows otherwise so-called “conflicted compensation” to be paid if the terms of the BICE are met. Understanding and complying with BICE will help advisors and financial services providers avoid liability and ERISA litigation.

In order to meet the BICE requirements, fiduciaries must sign a “Best Interest Contract” (BIC) with the client, provide ongoing disclosure of compensation, disclose all material conflicts of interests, and avoid violating the Impartial Conduct Standards. Fiduciaries who meet the BICE requirements may be able to take part in otherwise “prohibited transactions.”

Prohibited transactions include paying unreasonable compensation for retirement plan management. Unreasonable compensation may be difficult to define. There is not a set number or percentage which separates reasonable versus unreasonable compensation. As such, reasonable compensation does not require using the lowest cost providers. Nevertheless, plan administrators must evaluate the cost of investment products and services and compare them to similar plan costs to determine whether the price is reasonable.

Advisors who meet the BICE requirements will be able to accept compensation for providing investment products without necessarily violating their fiduciary duty to act in the best interests of their clients. This includes accepting commissions, revenue sharing, or other types of compensation paid to advisors.

In some instances, investment clients may be advised to shift their retirement savings from one fund to another, or rollover investments between a 401(k), IRA, Roth IRA, or another investment device. When this advice involves shifting to a higher fee or cost structure, a fiduciary may have to justify their recommendations by showing the investment strategy is in the best interests of their client. To do so, fiduciaries should ready to be able to show they acted in the best interests of their client by disclosing their compensation, disclosing costs and fees, educating the client on the benefits and drawbacks of each type of investment, and demonstrating how the rollover can benefit the client.

One viable recommendation for reducing legal risk is to adopt a third-party verification system. A third-party verification (TPV) service would allow plan providers to ensure a customer understands the recommendation for a rollover or change in investment. This includes understanding the fees and costs associated with a financial transaction, compensation for the advisor, benefits, and risk of the investment, and the reasons for making the transaction. A TPV could also provide documentation of the client's understanding should litigation arise.

If you have any questions about the new Department of Labor fiduciary rules and how they may impact your company, contact your ERISA attorneys. Butterfield Schechter LLP is San Diego County's largest firm focusing its law practice on employee benefits. Our firm can help you maintain compliance with fiduciary duties, avoid ERISA penalties, and represent you in ERISA litigation. Contact our office today with any questions on how we can help you and your business succeed.

About the Author

Paul D. Woodard

Paul Woodard practices in the areas of Employee Benefits, Employee Stock Ownership Plans, Pension and Profit Sharing Plans, ERISA, ERISA Litigation, Business Law, Qualified Domestic Relations Orders (QDROs), and Estate Planning.


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