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You have a partner in navigating the
Department of Labor fiduciary proposal
Over the past several years, the Department of Labor (DOL) has been focused on fee disclosure to ensure
plans are aware of the direct and indirect compensation of their service providers. The DOL’s proposed
fiduciary rule applies a similar philosophy with the intention of preventing possible conflicts of interest,
specifically those that could arise when an advisor gets paid more for selling certain investments than others.
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Nationwide will be your partner in breaking down and simplifying key topics to help you better understand
the proposed rule and prepare for the changes.
What it means to have a fiduciary duty under ERISA
The root of the DOL’s proposal— and possibly the most significant impact — is the expansion of who is
considered to be a fiduciary under the Employee Retirement Income Security Act (ERISA). This is significant
because ERISA requires the highest standard of duty in the investment industry.
An ERISA fiduciary has two core duties:
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Duty of Loyalty
The Duty of Loyalty means the advisor,
as an ERISA fiduciary, must:
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act and make recommendations
that are solely in the interests of
his or her clients
and avoid conflicts of interest
such as financial incentives.
2 Duty of Prudence
The Duty of Prudence means the advisor,
acting as an ERISA fiduciary, must:
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act and make recommendations with
the care, skill, prudence and diligence
that a prudent person would
and base recommendations on the
customer’s specific investment
objectives, risk tolerance, financial
circumstances and needs.
Please note: The final rule may differ from its proposed form, so Nationwide can’t predict the requirements of the rule. Firms may choose
varying ways to comply with the rule.
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Expanded Definition of ERISA Fiduciary
Under the proposal, the definition of investment advice is expanded to include recommendations to certain
plans and IRAs that are individualized or specifically directed toward a customer. According to the proposal,
advisors will have fiduciary status when their recommendations meet a two-part test:
Part 1 — The Advice
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The advice is related to the acquiring, holding or disposing of securities or other property, including a
recommendation to take a distribution or to roll over assets to an IRA
Management of securities or other property, including distributions and rollovers
Appraisal, fairness opinion or similar statement concerning the value of securities or other property in
connection with asset acquisitions by a plan or IRA
Recommendation of a person who will receive a fee for providing any of these types of advice
Part 2 – The Advice-giver
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The advice-giver, either directly, through or together with an affiliate, represents or acknowledges the
fiduciary nature of the advice; or
Acts according to an agreement, arrangement or understanding with the person receiving the advice
that the advice is individualized or specifically directed to the person for consideration in making
investment or management decisions regarding plan assets.
Proposed “Carve Outs”
Under the proposal, there are some “carve outs” or exceptions to being a fiduciary. However, most of the
exceptions are designed for platform providers or advisors to large retirement plans and are generally not
applicable to individual advisors.
One exception that had been previously available to individual advisors was for investment education. It
allowed advisors to furnish plan information, general financial, investment and retirement information, asset
allocation models or interactive investment materials to a plan or participant, without it being considered
individualized advice and subject to a fiduciary standard.
The proposal substantially limits the application of this exemption by narrowing the definition of “education.”
Generally, to be eligible for the carve out, education can only focus on asset allocation models and cannot
include information about specific products.
Please note: The final rule may differ from its proposed form, so Nationwide can’t predict the requirements of the rule. Firms may choose
varying ways to comply with the rule.
Exemptions provided in the proposal
The proposal requires an advisor to act in the client’s sole interest and to avoid conflicts of interest that may be
created when an advisor or firm gets paid more for selling one product than another. This is considered a
“Prohibited Transaction.”
There are several prohibited transaction exemptions (PTEs) in the DOL’s proposal that would allow an advisor to
receive compensation not normally permitted under ERISA. It’s important to note that the PTEs do not absolve
advisors of their fiduciary obligations.
Two of the most talked-about PTEs are:
Best Interest Contract Exemption (BICE): In response to the overwhelming concern from the financial
industry on regulating compensation, the DOL added BICE to the proposal.
To qualify for the exemption, an advisor must present a detailed contract, referred to as a Best Interest
Contract (you may hear it also called the BIC), to an investor before any specific products are discussed.
The BIC must:
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Acknowledge the advisor’s fiduciary duty
Commit to the basic standards of impartial conduct
Certify that the firm has policies in place to mitigate conflicts of interest
Disclose the conflicts of interest and cost of their advice
Under the proposal, the BIC exemption applies to advisors who receive varying commission levels and
who provide investment recommendations for security products to:
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Participants or beneficiaries of certain ERISA governed plans
IRA owners or beneficiaries
Plan sponsors of small nonparticipant-directed plans (less than 100 participants).
The BICE does not apply to recommendations for 401(k) or other participant-directed
plans.
The BIC has been a hot topic because of the potentially onerous processes, recordkeeping and reporting
necessary to meet the requirements for exemption. There is also concern that the amount of information
required in the BIC could seem overwhelming for an investor to absorb in an initial conversation.
PTE 84-24: The DOL has proposed amendments to the existing PTE 84-24 as well.
In its current form, the 84-24 exemption generally allows advisors to receive varying commission levels for
the sale of insurance and annuities in IRAs and employee benefit plans, which would otherwise be
prohibited under ERISA.
The proposed amendments to PTE 84-24 would no longer permit advisors to use the exemption when
selling annuities that are considered securities to IRAs. To receive commissions for selling these types of
products to IRAs, advisors would have to use the BIC exemption. For sales to employee benefit plans and
participants, the 84-24 exemption would still apply as it does today.
Another amendment to PTE 84-24 proposed in the rule would exclude revenue-sharing payments,
administrative fees, marketing allowances and third-party payments from the sales commission previously
allowed through the exemption. An advisor selling under 84-24 may no longer be able to collect these
additional sources of compensation.
Please note: The final rule may differ from its proposed form, so Nationwide can’t predict the requirements of the rule. Firms may choose
varying ways to comply with the rule.
Timing of the rule
The fiduciary proposal was submitted to the Office of Management and Budget on January 28, 2016 and is
anticipated to be finalized late in the first quarter. The proposal is expected to permit a period of time for
firms and providers to make the necessary process and reporting changes before the rule is implemented.
The timeline below shows the progression of the DOL rule starting with its original proposal in 2010.
Nationwide has been preparing over the past year and has the people, processes and funding in place to
adapt to the rule.
Navigating the new fiduciary world
While there may be some uncertainty as the DOL’s proposal moves closer to finalization, there is also
opportunity. The expansion of fiduciary scope allows our industry to formally demonstrate to investors how
the vast majority of us already view our role — to do what’s in the best interest of clients.
You have a partner in navigating what’s ahead. Nationwide will support you with education, resources and
practical thought leadership programs to help you think through your fiduciary role, and more importantly,
continue to serve your clients’ investment needs.
Nationwide, the Nationwide N and Eagle, Nationwide is on your side and Nationwide Retirement Institute are service marks of Nationwide
Mutual Insurance Company. © 2016 Nationwide
NFM-15248M1 (03/16)