DOL Conflict Rule - 401(k) Plan Sponsors Need to Step Into the Serve

Frankly, the DOL fiduciary rule that went into place earlier this summer has been a much bigger deal for the 401(k) industry than it has been for 401(k) plan sponsors. It is the industry that has had to consider its requirements, make decisions about its impact on their business practices, the use of related exemptions, and then implement changes. This is not to say plan sponsors have no skin in the game, but their position has been much more reactive.

The new rule carries burdens for plan sponsors that are associated with the duties of loyalty and care they have to their plans. Things have changed for plan sponsors too. Recommendations concerning investment strategies or of investment managers that were not investment advice prior to the new rule are now. So, too, as has oft been stated in the past year by many commentators, are recommendations to participants concerning distributions and rollovers. Advisers that were not fiduciaries prior to June 9, 2017 that make these recommendation may now be considered so after this date and the variable compensation they receive may be forbidden unless covered by an exemption (in many cases the Best Interest Class Exemption or BICE). Plan sponsors must grasp these significant changes and figure out how to handle them. 

Impartial Conduct Standards under BICE:

  • Act in best interest
  • Take no more than reasonable compensation
  • Avoid material misrepresentations

It is not enough to passively receive information from the adviser, such as required service provider disclosures. It’s going to take more than that.  Allow me to explain. I play a lot of tennis. I have learned over the years that with hard-serving opponents I need to step into their serves. If I don’t, I don’t have much of a chance; my return of their serve will be weak and ineffective. The same is true for plan sponsors facing the strong serves of advisers vying for their business and for more revenue. Plans sponsors need to step into these serves. This means they must vigorously examine their sales collateral, their promises, their agreements, and their direct and indirect compensation.

But what should plan sponsors being doing specifically?

I boil it down to this: blog_image_5.png

  • Find out whether the adviser is receiving variable compensation from a third party
  • Determine whether the adviser is providing investment recommendations. This means more than accepting an adviser’s disclaimer that they are not providing investment advice. Plan sponsors need to determine what capacity advisers are acting in at both the plan level and participant level.
  • If the adviser is making investment recommendations and receiving variable compensation, determine whether they have taken an off-ramp under the rule from being considered investment advice fiduciaries.
  • If the adviser is not on an off-ramp from being an investment adviser under the new rule, determine whether they are complying with the conditions of an applicable exemption. In most cases this will be BICE and the Impartial Conduct Standards.
  • Find out the third parties that pay the adviser and how much. For example, Ed Lynch in a recent post [add link to Ed’s Shelf Space Blog] provides useful discussion of how mutual fund payments to recordkeepers increase fund expenses and decrease rate of return.
  • If the adviser operates under BICE and the Impartial Conduct Standards, you may want to have them show you their written policies and procedures. How do their policies and procedures (or lack of them) demonstrate they are meeting the conditions of that exemption?

Investment Advice Off-Ramps under the rule:

  • Platform provider
  • General information
  • Transactions with independent fiduciaries with investment expertise
  • Investment education

Plan sponsors that do these things put the ball in play and maybe will even hit a few winners for avoiding conflicts, prohibited transactions, and the high fees associated with all of that. In subsequent blogs I’ll talk about the investment advice off-ramps mentioned above and about related challenges for plan sponsors in protecting plan interests.

Note: For non-believers in the conflict of interest rule, it has not gone away yet. Those advisers making investment recommendations and receiving variable compensation must in the main operate under BICE. This means having to comply with the Impartial Conduct Standards of that exemption at least through the end of this year and likely beyond. What changes will come to the rule in the coming months, either through further regulatory action at the DOL or via legislation remains to be seen.



Chuck Humphrey, Esq., is a former IRS and Labor Department attorney and the principal of the Law Offices of Charles G. Humphrey. He has provided counsel to plan sponsor and financial industry clients for over 35 years. He is also a consultant to Fiduciary Plan Governance and the author of A Guide to ERISA Fiduciary Responsibilities, available at