RPA2 Module 11

Question 1

(a) Why should a plan sponsor establish a formal retirement plan committee, and
(b) who comprises the membership of this committee?

Answer 1

(a) A plan sponsor should establish a formal retirement plan committee that has responsibility regarding the governance and administration of the retirement plan. While this committee may not be responsible for actually performing any of the administrative functions or handling actual participant communication relative to the plan, the committee does delegate that responsibility to an appropriate party and provides oversight to ensure that the proper actions are happening in a timely fashion.

(b) The membership of this committee is generally fairly small. Three to five
individuals often are sufficient, and membership consists of key senior leaders of the organization. In a small company, it may consist of the company president and the senior financial and human resources officers. In a larger company, the membership may be the chief financial officer, the human resources vice president and the corporate counsel, plus two other organizational members from senior management.

Question 2

What is the charge given to the retirement plan committee, and what are its
responsibilities?

Answer 2

The retirement plan committee should be authorized by the corporation with the charge to make all decisions necessary regarding the administration of the retirement plan. This committee determines the plan design, selects the service providers, meets with legal counsel and reviews the overall status of the plan.

As a committee, they meet at least annually but probably no more than quarterly—unless addressing some current, pressing issue. As an ongoing committee, the agenda focuses on investment performance review and administrative service provider review as well as addresses any legal or regulatory change that affects the retirement plan.

In some companies, the retirement plan committee also may review and approve any written policies and procedures that are developed to assist in the day-to-day administration of the plan. Other companies permit the human resources or benefits department to develop and implement those policies and procedures without formal approval by the committee.

Question 3

Describe how the retirement plan committee delegates responsibilities to other
parties concerning the retirement plan.

Answer 3

A key function of the retirement plan committee is the delegation of responsibilities to other parties. This includes internal corporate delegation as well as the delegation of certain plan functions to external service providers such as a plan trustee, recordkeeper, actuary, investment manager and plan consultant.

Although a corporation may hire external entities to provide these services, this does not relieve the plan sponsor of fiduciary responsibility for these functions. Therefore, it is essential that the retirement plan committee understand clearly what these external service providers will and will not be doing relative to the administration of the plan.

Question 4

What is a fidelity bond, and how does it offer protection to a plan sponsor?

Answer 4

A fidelity bond is a form of protection that covers policyholders for losses that are incurred as a result of fraudulent acts by individuals specified in the bond’s contract.

All qualified retirement plans are required to have a fidelity bond that covers at least 10% of the plan assets in case of loss to the plan because of criminal acts or embezzlement by any of the plan fiduciaries or other plan officials. The maximum required amount for the fidelity bond is $500,000 unless the plan holds employer securities, in which case the maximum is increased to $1 million.

It often is possible to have this fidelity bond added to the corporation’s existing fidelity bond, but care should be taken to ensure that the fidelity bond fully complies with Employee Retirement Income Security Act (ERISA) requirements.

Question 5

What role does the retirement plan committee play in decisions regarding plan
design?

Answer 5

The retirement plan committee plays a substantive role in decisions regarding retirement plan design. The actual decision regarding the plan design is typically a key responsibility of the retirement plan committee.

While this decision should be made with advice supplied from consultants and legal advisors, it is important for the committee to determine the fit between the choice of various plan features and the unique benefit goals and human resource issues of the corporation.

The initial design of the plan is important, but time is more often spent on ongoing amendments to the plan

Question 6

What is an amendment to a plan document, and why do amendments often result in additional plan changes?

Answer 6

An amendment to a plan document is a change or modification to the plan document that alters the operation of the plan. Such amendments are often driven by changes in the laws that occur on a continuing basis.

Most companies will use the opportunity presented when amendments are needed to comply with new legal requirements, to reevaluate other features in the plan or to determine whether other amendments should be implemented. Drafting, reviewing, implementing and communicating amendments is a costly process.

It not only involves legal costs but also adds the expense of distributing information to plan participants and changing other employee communications such as policy manuals and company websites. Sometimes a plan amendment necessitates changes to payroll systems and company procedures.

Often an amendment is communicated through issuance of a summary of material modification (SMM).

Question 7

When new legislation occurs regarding retirement plans, when is the effective
date by which a plan sponsor must comply with the change, and how must the
sponsor comply with the law during the interim period before the plan document is amended?

Answer 7

Often, the effective date for any required change because of new legislation is the start of the following plan year after the legislation is passed by Congress, even though the plan document is not required to be amended for a period of up to two or three years.

For example, the Pension Protection Act of 2006 (PPA) had several
provisions that became effective on the first day of the plan year that began on or after January 1, 2007. Even though these changes were expeditiously implemented as directed by PPA, the plan documents affected were not required to be formally amended until the last day of the plan year that began in 2009.

Therefore, a plan sponsor needed to operate in compliance with the terms of PPA for up to three years before the plan document was actually amended to reflect these changes.

New legislation creates two distinct challenges for a plan sponsor: First, the plan sponsor must determine what elements of the plan will be altered due to the new legislation. Second, the plan must be consistently administered according to the altered terms of the plan, in the same way that it will be after the amendment process has occurred.

A plan that ignores operating in a manner directed by the new legislation until the formal amendment deadline would be found to be out of compliance with the law. Failure to make these plan changes in a timely manner places the plan at risk of being penalized by the Internal Revenue Service (IRS) or the Department of Labor (DOL). Therefore, a procedure should be established that clearly identifies how the plan will operate
during this interim period until the plan document has been formally amended.

Question 8

How do policies and procedures work in conjunction with a plan document in the operation of a retirement plan?

Answer 8

While the plan document provides the formal legal structure and general operating policies of the plan, numerous other procedural elements require more in-depth plan features that need to be addressed that are not detailed in the plan document.

A well-managed plan will have a set of policies and procedures that guide the daily operation of the plan. There are some policies that every plan should have and that should be formally prepared, reviewed and maintained. These include an investment policy; policies regarding participant loans and hardship distributions, if applicable; and a policy regarding qualified domestic relations orders (QDROs).

Some of these policies, such as the investment policy, can be anticipated at the plan’s inception and should be in place at the start of plan operations. Other policies may be determined when a question or unique situation arises.

Question 9

Does a retirement plan that permits participant-directed investments need an
investment policy? Explain.

Answer 9

An investment policy is needed for every type of plan, including a plan that permits participants to direct the investments in their own accounts. The investment policy is the written document outlining the guidelines for the structure, operation and decision making for the investments held by the retirement plan.

The investment policy would include such things as the selection criteria for the investment managers or mutual funds offered in the plan, the benchmarks that will be used to measure the performance of the investments, the process and criteria used to change an investment or fund offering, the frequency with which the investments will be reviewed (quarterly or annually) and how the investment fees are to be paid. If the
plan investments are not participant-directed, then the policy should include the targeted asset allocation and the frequency of rebalancing. If the investments are participant-directed, the policy should include the number of fund options permitted, the range of investment options allowed and the default investment option.

It also is important to specify whether any restrictions exist on certain types
of investments, such as establishing that no investments are permitted in hedge funds or in mutual funds that have a front-end load.

Question 10

Describe the issues addressed in a retirement plan’s loan policy.

Answer 10

The loan policy is the guiding document that provides answers to many of the administrative issues that arise for plan loans. In addition to stating the statutory limits or plan limits (if different) regarding participant loans, this policy also provides guidance regarding how certain events will be handled.

For example, if a participant has an outstanding loan and then is terminated, what will happen? Will the plan permit the participant to continue making payments on the loan, or will the participant be required to repay the loan at that time or have the loan amount deemed to have been distributed (a taxable event)? By establishing policies in advance of situations, the staff administering the plan is able to provide consistent answers to questions from plan participants. This minimizes the risk that unfair treatment to one participant over another will occur. Participant loans continue to be
an area of scrutiny by IRS during audits, so proper administration is very important.

Question 11

Describe the types of issues addressed in a policy regarding hardship withdrawals.

Answer 11

A policy regarding hardship distributions should be in place if the plan permits these types of distributions. While the plan document will establish the minimum requirements regarding what qualifies as a hardship, the policy should include the following elements:

(a) How frequently are hardship distributions processed (monthly, quarterly or on an ad hoc basis)?

(b) Is there a minimum hardship withdrawal loan amount requirement (e.g.,
$1,000)?

(c) What will be acceptable proof to establish the hardship, and/or who will make the determination that there is in fact a hardship?
(d) What other sources of funds must a participant have used or attempted to use prior to applying for a hardship distribution?

Question 12

Distinguish the differences between what is contained in the plan document and the policy document regarding similar plan features.

Answer 12

The difference between what is contained in the plan document regarding plan features, like loans or hardships, and what is contained in the policy often is confusing.

Generally, the elements within the policy are items that may change over
time because of changing aspects of the business, internal procedures or even government regulations. While it is important to have a consistent policy applied evenly to all participants, it also is important that a plan administrator be able to respond to changing conditions without having to amend the formal plan document frequently. The policy document serves as the guide for the day-to-day functions of the plan. Of course, the actual plan document is the controlling instrument, and any policy or procedure developed must agree with the terms of the plan document.

Question 13

How does the use of service providers alter the legal liabilities of the plan
administrator?

Answer 13

Using various service providers generally does not change the fact that the company remains the plan administrator for the legal purposes of the plan document. The company is responsible for the actions of these service providers, so it is important that the company makes the selection carefully and monitors how the services are provided. The first step is to determine what elements should be performed by internal staff and which are better completed by external providers.

Depending on the size and nature of a company or organization, certain functions may be completed more easily by the plan sponsor. Over time, the particular mix of who is responsible for which pieces of the plan administration may change.

Question 14

What is a request for proposal (RFP), and how is it utilized in selecting a plan
service provider?

Answer 14

An RFP is a formal written document distributed to vendors inviting them to
present their capabilities and place a bid with their pricing to become a service
provider to the plan. The RFP generally identifies the key items that will be critical to the decision to select one provider over another. Thus, each RFP differs, depending on the particular needs of the organization drafting the RFP.

Question 15

What factors contribute to the success of the partnership between plan service
providers and plan sponsors?

Answer 15

The success of the partnership between plan service providers and plan sponsors depends on the ongoing communication among the various parties involved in the partnership as well as the quality and timeliness of the services being provided.

The plan sponsor retains ultimate responsibility regarding the legal compliance of the plan as well as for ensuring that the participants’ needs are being met by the plan service providers. Therefore, the plan sponsor needs to carefully monitor the actions of the service providers to ensure that they are administering the plan according to the terms of the plan document as well as adhering to the agreed-upon levels of service.

Many companies establish a practice of formally assessing the service
providers on a regular basis, such as every three to five years. In some cases, this may only be an internal review, while in other cases the plan sponsor may proceed with a full RFP process each time.

Question 16

In contrast to a defined benefit plan, why are the fees charged to a defined
contribution plan a fiduciary issue?

Answer 16

For defined benefit plans, the impact of any fees is borne by the plan sponsor, since they are either paid directly by the plan sponsor from assets outside the plan or paid from plan assets. If paid from plan assets, this effectively results in increased contribution requirements for the plan sponsor since participant benefits are determined by the plan’s formula.

However, for defined contribution plans, if the fees are paid from plan assets, the net effect is to reduce participant benefits. Therefore, the actual structure of the fees for defined contribution plans becomes a fiduciary issue. In short, plan fees have a detrimental impact on participant and beneficiary benefits in a defined contribution plan.

Question 17

Describe typical types of fees assessed on mutual funds that are commonly the underlying investments in defined contribution plans.

Answer 17

The following represent typical types of fees that are assessed on mutual funds that are commonly the underlying investments in defined contribution plans:

(a) Sales charges (also known as loads or commissions). These are basically
transaction costs for the buying and selling of shares. They may be computed in different ways depending on the particular investment product.

(b) Management fees (also known as investment advisory fees or account
maintenance fees). These are ongoing charges for managing the assets of the investment fund. They generally are stated as a percentage of the amount of assets invested in the fund. Sometimes management fees may be used to cover administrative expenses.

The level of management fees can vary widely, depending on the investment manager and the nature of the investment product. Investment products that require significant management, research and monitoring services generally will have higher fees.

(c) Other fees. This category covers services such as recordkeeping, furnishing of statements, toll-free telephone numbers and investment advice. It also covers costs involved in the day-to-day management of investment products. This expense category may be stated either as a flat fee or as a percentage of the amount of assets invested in the fund.
(d) Some mutual funds assess sales charges (see the first item for a discussion of sales charges). These charges may be paid when an individual invests in a fund (known as a front-end load) or when he or he sells shares (known as a back-end load, deferred sales charges or redemption fees). A front-end load is deducted upfront and, therefore, reduces the amount of a participant’s initial investment.

A back-end load is determined by how long a person keeps the investment.
Various types of back-end loads exist, including some that decrease and
eventually disappear over time. A back-end load is paid when the shares are sold (i.e., if the participant decides to sell a fund share when a back-end load is in effect, he or she will be charged the load).

(e) Rule 12b-1 fees. Mutual funds also may charge what are known as Rule 12b-1 fees, which are ongoing fees paid out of fund assets. Rule 12b-1 fees may be used to pay commissions to brokers and other salespersons, to pay for advertising and other costs of promoting the fund to investors, and to pay various service providers to a 401(k) plan pursuant to a bundled service arrangement. They usually range between 0.25% and 1% of assets annually. Some mutual funds may be advertised as “no-load” funds. This can mean that there is no front- or backend load. However, there still may be an incremental 12b-1 fee.

Question 18

What is a collective investment fund, and how does it charge fees when offered as an investment option under a 401(k) plan?

Answer 18

A collective investment fund is a trust fund managed by a bank or trust company that pools investments of 401(k) plans and other similar investors. Each investor has a proportionate interest in the trust fund assets. For example, if a collective investment fund holds $10 million in assets, and a participant’s investment in the fund is $10,000, the individual has a 0.1% interest in the fund.

Like mutual funds, collective investment funds may have different investment objectives. There are no front- or back-end fees associated with a collective investment fund, but there are investment management and administrative fees.

Question 19

Define what is meant by soft-dollar arrangements as they relate to retirement plans.

Answer 19

Soft-dollar arrangements occur when the standard fee charged for a service is greater than the actual cost incurred.

For example, if it costs a brokerage firm 4¢ to execute a trade but the standard charge is 10¢, the brokerage firm could make the difference
(6¢) available to the broker initiating the trade for use against the cost of various services. This might be used for services such as access to the brokerage firm’s security analysis system. This practice is permitted under Securities and Exchange Commission (SEC) regulation 28(e).

In the retirement plan world, this arrangement may provide services to the investment consultant used by the plan.

Question 20

What are subtransfer agent fees, and why must plan sponsors understand them?

Answer 20

Subtransfer agent fees are typically found in a participant-directed account plan, such as a 401(k) plan. The fees may be structured as a flat dollar amount per participant ($9) or as a small percentage of assets (10 basis points).

Two potential issues arise with this fee. First, if it is charged as a percentage of assets, the fee will increase as the plan assets grow—even though there has been no corresponding increase in services provided to either the plan or the participant.

The second issue relates to who receives this payment and what services have been provided for this fee. This arrangement often is used to cover the cost of the recordkeeping services. However, because different mutual funds provide different levels of subtransfer fees to the recordkeeper, this may cause the recordkeeper to encourage the use of one fund over
another. Therefore, it is important the plan sponsor know what subtransfer fees are being received and the extent used to offset the overall cost of the services provided to the plan.

Question 21

In general terms, what issues must be considered by plan sponsors when two
companies sponsoring defined contribution plans decide to merge operations?

Answer 21

When two companies sponsoring defined contribution plans decide to merge, several issues must be considered and must be addressed early in the merger process.

A primary decision must be made—whether the two plans will be combined or whether both plans will continue to be maintained separately. While it may be easier initially to maintain two plans, in the long term this generally is feasible only if there will be an overall separation of the two workforces rather than the creation of an integrated company. If the decision is made to maintain two separate plans, it will be necessary to make sure that both plans properly address the treatment of employees who transfer between the two divisions, ensuring that the plans give credit for service with either company for vesting purposes.

The plans also need to specify which employees are considered participants in which plans, and whether a participant who transfers between the divisions can transfer his or her account from one plan to the other.

Question 22

Explain how consumer protections regarding investment advice were crafted
under the prior regulatory regime and what changes were made by the Fiduciary Advice Rule.

Answer 22

ERISA and the Internal Revenue Code (IRC) establish consumer protections for some investment advice that does not fall within the ambit of federal securities laws and vice versa.

Both ERISA and IRC define a fiduciary to include those who render “investment advice” for a fee or other compensation, direct or indirect, with respect to any monies or other property of such plan or those who have any authority or responsibility to do so.

However, the original regulation defined qualifying investment advice in a restrictive way that required, among other things, that the advice be provided on a regular basis and pursuant to an understanding that the advice would be a “primary” basis for the plan’s investment decisions.

Thus, advice provided on a single occasion (e.g., advice concerning plan rollovers) would not qualify, and most contracts with benefit plan investors simply contained a provision that the advice was not being provided as a primary basis for investment decisions. This made it relatively easy to avoid fiduciary status for advice providers.

Now, though, the Fiduciary Advice Rule substantially expands the definition of investment advice in this context, with vast implications. Investment advice is defined as a recommendation to a plan, plan fiduciary, plan participant, plan beneficiary or an individual retirement account (IRA) owner for a fee or other compensation, direct or indirect, as to the advisability of buying, holding, selling or exchanging securities or other property or as a recommendation as to how securities or other investment property should be invested after a rollover. Covered investment advice also includes recommendations as to the management of securities or other investment property, including recommendations on investment policies or strategies, portfolio composition, selection of other persons to provide investment
advice or management services, or selection of investment account or as
recommendations with respect to rollovers, transfers or distributions, including recommendations as to the amount, form and destination of such rollover, transfer or distribution.

The key to determining the existence of fiduciary investment advice is whether a recommendation occurred. A recommendation is defined as 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 more individually tailored the communication is to a specific advice recipient or recipients, the more likely the communication will be viewed as a recommendation.

Question 23

What are the two major implications of qualifying as a fiduciary under ERISA and/ or IRC?

Answer 23

Qualifying as a fiduciary not only imposes a variety of stringent fiduciary duties, but it also complicates compliance with the prohibited transaction rules under both ERISA and IRC.

Question 24

Describe the Best Interest Contract (BIC) Exemption and the conditions under
which a fiduciary would qualify for it.

Answer 24

If an advisor is subject to the fiduciary provisions of ERISA and IRC because he or she provides fiduciary investment advice, then the advisor is prohibited from receiving certain types of compensation, such as commissions, and from providing advice regarding proprietary products or investments paying additional fees.

In order to permit such advice and commission-based compensation, the advisor must meet the conditions of a prohibited transaction exemption. In the Fiduciary Advice Rule, DOL issued a new class exemption, the BIC Exemption.

To qualify for the BIC Exemption, financial institutions and advisors must abide by certain conditions, including:
(a) Advisors to employee benefit plans and IRAs must abide by the DOL’s newly adopted impartial conduct standards, and financial institutions must adopt policies and procedures designed to ensure that their individual advisors adhere to these standards.
• The impartial conduct standards require that financial institutions and
advisors provide investment advice that is, at the time of the recommendation, in the best interest of the retirement investor.
• Financial institutions and advisors must ensure that they will not receive,
directly or indirectly, compensation for their services that is in excess of
reasonable compensation within the meaning of the prohibited transaction
exemptions for service providers.
• The impartial conduct standards require that financial institutions and advisors ensure that their statements about the recommended transaction, fees, compensation, conflicts of interest, and any other matters relevant to an investor’s investment decisions will not be materially misleading at the time they are made.

(b) Financial institutions seeking to rely on the BIC Exemption must also affirmatively represent in writing that they and their advisors are fiduciaries under ERISA and IRC and must warrant that they have written policies in place designed to ensure that their advisors adhere to the impartial conduct standards.
(c) With respect to IRAs and other plans that are not subject to Title I of ERISA, financial institutions seeking to rely on the BIC Exemption must agree that they and their advisors will adhere to the exemption’s standards in a written contract that is enforceable by retirement investors. (Such a contract may not include any provision disclaiming or otherwise limiting liability, waiving the right to bring or participate in a class action, or agreeing to arbitrate or mediate individual claims in venues that are distant or that otherwise unreasonably limit the ability to assert the claims safeguarded by the BIC Exemption.)

Question 25

Summarize the five distinct categories of duties imposed upon fiduciaries by ERISA, as well as its additional stipulation concerning co-fiduciary duties.

Answer 25

ERISA imposes five distinct duties on fiduciaries. These duties are as follows:

(1) ERISA fiduciaries have a duty of loyalty.
(2) ERISA fiduciaries have a duty of prudence.
(3) ERISA fiduciaries have a duty to diversify investments.
(4) ERISA fiduciaries have a duty to follow the plan documents.
(5) ERISA fiduciaries have a duty to monitor.

In addition to the previously stated five distinct duties, ERISA also imposes cofiduciary duties. Under ERISA, a fiduciary can be liable for the actions of another fiduciary if the first fiduciary:

(a) Knowingly participates in or conceals the second fiduciary’s breach of fiduciary duties
(b) Fails to abide by the fiduciary duties and thereby enables the second fiduciary to breach the fiduciary duties or
(c) Has knowledge of a fiduciary breach and fails to act to remedy the breach.

Question 26

Provide the definition of an investment advisor as contained in the Investment
Advisers Act (Advisers Act), detailing its three main elements and six exclusions.

Answer 26

An investment advisor is any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing or selling securities or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities.

Unless one of six exclusions applies, a person is considered an investment advisor under the Advisers Act if each of the following three elements is met:

(a) The person provides advice or issues reports or analyses to others concerning securities.
(b) The person is in the business of providing those services.
(c) The person provides those services for compensation. The Advisers Act generally excludes the following six categories:

(a) Banks, bank holding companies and savings associations
(b) Lawyers, accountants, engineers and teachers
(c) Certain brokers and dealers
(d) Publishers of bona fide publications of general and regular circulation
(e) Government securities advisers
(f) Nationally recognized statistical rating organizations (NRSROs)
(g) Other persons excluded by the SEC pursuant to statutory authority.

(The limited exemption for broker-dealers is particularly significant because many courts have held that brokers are not subject to fiduciary duties unless they have investment discretion over an account.)

Question 27

Describe how the scope of fiduciary regulation is narrower under the securities laws than under the Fiduciary Advice Rule.

Answer 27

The scope of fiduciary regulation in many respects is narrower under the securities laws than it is under the Fiduciary Advice Rule. Generally, fiduciary duties under the securities laws may not apply to brokers absent discretionary control over trading decisions.

Additionally, the Advisers Act applies only to those “in the business” of providing investment advice. In contrast, the Fiduciary Advice Rule applies
whenever investment advice is provided. Also, the Fiduciary Advice Rule is
structured broadly to apply to anyone who provides investment advice to benefit plan investors, whereas the Advisers Act applies only to those who meet the definition of investment advisors.

The Advisers Act also applies only to securities, whereas the Fiduciary Advice Rule broadly covers securities and “other property.” Furthermore, the Fiduciary Advice Rule also applies broadly to recommendations about management decisions, such as whether to roll money from an employer-sponsored plan to an IRA. The BIC Exemption currently prohibits receipt of anything beyond “reasonable compensation” and regulates not only substantive requirements but also the fees charged for advisory services. Thus, the Fiduciary Rule touches conduct beyond just investment recommendations and places some limits on compensation arrangements, especially those that create potential conflicts.

Question 28

What is the implication of ERISA fiduciary obligations being more specific and
well-defined than those attributable to the Advisers Act?

Answer 28

There are important implications of ERISA fiduciary obligations being much more specific and well-defined. ERISA has a specific statutory enumeration of the components of the ERISA fiduciary duty, and there is a well-developed body of case law.

In contrast, the Advisers Act itself does not describe substantive fiduciary
obligations, nor do the federal courts look to state law for guidance on specific obligations. Existing federal law provides only general guidance as to the substantive parameters of fiduciary obligations under the Advisers Act.

Accordingly, the implication for an advisor coming under the more detailed
obligations of ERISA subjects that advisor to a more detailed, and more robust, fiduciary requirement and thus increases the risks of litigation for fiduciary breach

Question 29

Explain how certain litigation avenues previously unavailable to aggrieved parties before the adoption of the Fiduciary Advice Rule would now be available.

Answer 29

The BIC Exemption, as it currently stands, requires certain contractual language that would create a private cause of action now; whereas heretofore such a litigation path in the absence of such contract language was probably unavailable.

For plans subject only to Code Section 4975 (including IRAs), the BIC Exemption is now crucial because it requires that best-interest standard be part of a contract enforceable under state law. Thus, advisors previously subject only to fiduciary duties under the Advisers Act may now also be subject to state lawsuits to enforce the best-interest standard as part of a breach of contract claim, if that advisor is relying on the BIC exemption.

Also, the Fiduciary Rule results in co-fiduciary liability under ERISA. Once fiduciary status attaches to an advisor, the fiduciary is potentially liable as a co-fiduciary for the breaches of other fiduciaries.

Question 30

Discuss the applicability of other requirements that emerge once an advisor is
deemed to have fiduciary status.

Answer 30

Fiduciary status carries with it other requirements and risks beyond just compliance with the fiduciary requirements. Some of these requirements can be summarized as follows:

(a) Fiduciaries face additional challenges complying with prohibited transaction rules. There is a broad statutory exemption for service providers, but DOL has taken the position that this exemption does not apply to transactions in which fiduciaries operate under a conflict of interest.

This makes finding a prohibited transaction exemption more difficult for fiduciaries and may leave many with no option other than compliance with the BIC Exemption, despite the added litigation risk.

(b) Fiduciaries are required to obtain a bond covering acts of theft and dishonesty.
(c) Fiduciary status may create potential liability not covered under some advisors’ existing insurance program. As a result, advisors may need to acquire fiduciary liability insurance.
(d) The fee-disclosure rules will also be an issue for those who wish to maintain the service provider exemption as an option.