The Department of Labor (DOL) final rule on the definition of “fiduciary” expands the definition not only for retirement accounts such as 401(k)s, 403(b)s and IRAs, but also as applied to non-retirement accounts such as Health Savings Accounts (HSAs), Archer Medical Savings Accounts and Coverdell Education Savings Accounts.
Why DOL Will Apply Final Fiduciary Definition to H.S.A. Advisors
Since the issuance of proposed regulations, the Department has received extensive comments on whether the fiduciary rules should apply to other non-ERISA plans, such as H.S.A.s and the others listed above, which are subject to Code section 4975. The final rule continues to include these ‘‘plans’’ in the scope of the final rule (defining who is a fiduciary). The DOL explained why in the preamble to the final regulations.
“The Department notes that these accounts are given tax preferences, as are IRAs. Further, some of the accounts, such as HSAs, may have associated investment accounts that can be used as long term savings accounts for retiree health care expenses. HSA funds may be invested in investments approved for IRAs (e.g., bank accounts, annuities, certificates of deposit, stocks, mutual funds, or bonds).”
“Thus, although they generally hold fewer assets and may exist for shorter durations than IRAs, the owners of these accounts and the persons for whom these accounts were established are entitled to receive the same protections from conflicted investment advice as IRA owners.”
The DOL cited research by the Employee Benefit Research Institute (EBRI) which indicates the following regarding HSAs (from page 20989 of the final regulations):
- As of December 31, 2014 there were 13.8 million HSAs holding $24.2 billion in assets.
- Approximately 6 % of the HSAs had an associated investment account, an estimated 3% of HSA owners actually invest their account balances, and 37% of HSAs had a balance of at least $10,000 at the end of 2014.
- HSA investments are likely to increase from an estimated $3 billion in 2015 to $40 billion in 2020.
The Final Rule: Who is an “Investment Fiduciary”?
An investment fiduciary is one who renders investment advice. The final rule provides that individuals “render investment advice if they provide for a fee or other compensation, direct or indirect,” the following categories or types of advice:
- A recommendation as to the advisability of acquiring, holding, disposing of, or exchanging, securities or other investment property; or
- A recommendation as to how securities or other investment property should be invested after the securities or other investment property are rolled over, transferred, or distributed from the plan or IRA; or
- A recommendation as to the management of securities or other investment property, including, among other things, recommendations on investment policies or strategies, portfolio composition, selection of other persons to provide investment advice or investment management services, selection of investment account arrangements (e.g., brokerage versus advisory); or
- A recommendation with respect to rollovers, distributions, or transfers from a plan or IRA, including whether, in what amount, in what form, and to what destination such a rollover, transfer or distribution should be made.
What is a “Recommendation”?
The final rule also describes when a communication, based on its context, content, and presentation, would be viewed as a ‘‘recommendation.” This is a fundamental element in establishing that an individual or entity is giving “fiduciary investment advice.”
Paragraph (b)(1) provides that ‘‘recommendation’’ means 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.
- This is an objective determination rather than a subjective inquiry.
- A communication is more likely to be deemed a “recommendation” the more it is individually tailored to a specific recipient, and relates to a particular security, investment property, or investment strategy.
- Providing a selective list of securities as appropriate for a particular recipient would be deemed a “recommendation” as to the advisability of acquiring those securities even if no recommendation is made with respect to any one security.
- A series of actions that might not individually constitute a recommendation may amount to a recommendation when considered in the aggregate. This applies whether the individual actions were made directly by one individual or entity or indirectly with any affiliate.
- The Preamble also states that it makes no difference whether the communication was initiated by a person or a computer software program.
Employees of Plan Sponsors Usually will NOT be Investment Advice Fiduciaries
Plan sponsors will be relieved to know that their employees whose job duties include management or administration of retirement and other accounts usually will not be considered investment advice fiduciaries. The DOL published FAQs on the Final rule defining who is an investment fiduciary. The FAQs state:
“Employees working in a company’s payroll, accounting, human resources, and financial departments who routinely develop reports and recommendations for the company and other named fiduciaries of the sponsors’ plans are not investment advice fiduciaries if the employees receive no fee or other compensation in connection with any such recommendations beyond their normal compensation for work performed for their employer.
Further, this exclusion also covers communications between employees, such as human resources department staff who communicate information to other employees about the plan and distribution options in the plan, as long as they meet certain conditions e.g. they are not registered or licensed advisers under securities or insurance laws and receive only their normal compensation for work performed by the employer.”
Compliance with the new requirements will not begin to be required until April 2017 — one year after the final rule is published in the Federal Register. Many service providers who previously were not considered fiduciaries now will be considered fiduciaries under the final rule. The Department believes the April 2017 date will provide adequate time for plans and their affected financial services and other service providers to adjust to the change from non-fiduciary to fiduciary status.
A phased in transition period applies for certain provisions (the Best Interest Contract Exemption and the Principal Transactions Exemption) from April 2017 to January 1, 2018.