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Investment advice rule heightens risk

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A federal rule that puts retirement plan advisers at risk of civil penalties if they fail to consider customers' best interests also could put employers at risk should they or their providers offer suggestions on investments in the plans they sponsor.

The Department of Labor issued its final fiduciary rule concerning retirement plans earlier this month, wrapping up nearly six years of rulemaking.

Under the rule, which revises a 1975 regulation, retirement plan suggestions to participants, such as whether or not to roll over a distribution from an employer retirement plan into an individual retirement account, would be considered fiduciary advice. In many cases, such suggestions could be considered prohibited transactions that subject advisers and employers to financial penalties under the Employee Retirement Income Security Act.

Last week, however, the U.S. House Education and Workforce Committee voted 22-14 largely along party lines to approve a resolution that would block enforcement of the rule.

“We must prevent this flawed rule from wreaking havoc on workers, retirees and small businesses, and today's vote is an important first step,” Rep. Phil Roe, R-Tenn., said in a statement prior to the committee's vote.

“We can directly reject costly regulations, and that is how we are going to try and stop this fiduciary rule,” House Speaker Paul Ryan, R-Wis., said last week during a press briefing.

Under federal law, Congress may vote to prevent a federal agency from implementing a rule or issuing a substantially similar rule without congressional authorization. Whether there is enough support to approve the resolution to halt the fiduciary rule's April 2017 implementation remains to be seen, however.

“We will just have to wait and see what Congress does,” said Kent Mason, a partner at law firm Davis & Harman L.L.P. in Washington.

Others say the likelihood that the rule would be blocked is low.

“My general view of these rules is that they're probably here to stay,” said Joseph Urwitz, a partner at McDermott Will & Emery L.L.P. in Boston.

While the 2017 effective date will give employers and their consultants time to analyze the rule and make any changes to prevent exposure to litigation, some observers say the result may be changes in the administration of benefit plans to prevent employers and administrators from taking actions that would be considered prohibited.

For example, employers could be exposed by advising employees who are leaving the company concerning account balances that have accumulated in corporate savings plans, such as 401(k) plans.

Employers “have to be very careful about communications materials. You don't want to do anything that could be considered investment advice, which, in turn, could make them fiduciaries,” said Robyn Credico, national director of defined contribution consulting at Willis Towers Watson P.L.C. in Arlington, Virginia.

“Employers can give information, but not advice,” said Bill McClain, a principal and defined contribution plan consultant at Mercer L.L.C. in Seattle.

Even giving information in some situations could be considered investment advice under the Labor Department rule. Mr. Mason, for example, said the Labor Department rule defines investment advice as any communication that could reasonably viewed as a “suggestion.”

A new employee, for example, might call human resources and ask what other employees are doing with their accounts.

If the HR department employee says that some employees have invested in target-date funds, that could make the employer a fiduciary, Mr. Mason said, since that could be viewed as a suggestion.