Second round of DOL fiduciary rule FAQs clears confusion on common compensation practice for 401(k) advisers

The Department of Labor, in its recent round of answers to frequently asked questions on the fiduciary rule, green-lit a popular compensation method used by retirement plan advisers that some had called into question following the department's previous regulatory guidance. The DOL's second tranche of adviser FAQs, published Friday, clarifies that an adviser charging clients a level asset-based fee for providing advice on 401(k) fund offerings may use revenue-sharing payments to offset part or all of that level fee, without running afoul of the fiduciary regulation. As an example, let's say an adviser charges an employer 30 basis points annually for ongoing investment advice on its $10 million 401(k) plan. That equates to $30,000 per year. If the adviser were to receive $15,000 in revenue-sharing payments such as 12b-1 fees from the plan's mutual funds, the adviser can, under current rules, use those payments to “offset” its overall fee, so the plan only owes an additional $15,000. The DOL explicitly approved this method of compensation in an advisory opinion from 1997 — Advisory Opinion 97-15A, known generally as the “Frost letter.” “This is the way things have been done for a long time now on the retirement plan side,” Ilene Ferenczy, managing partner at Ferenzcy Benefit Law Center, an employee benefits law firm based in Atlanta, said of the compensation practice. But, Ms. Ferenczy said, some were concerned answers the DOL provided in its first round of FAQs, released in October, meant the protection provided by the Frost letter would no longer be available under the fiduciary rule, which raises investment advice standards in retirement accounts. That would have been greatly disruptive to advisers using revenue-sharing payments to offset their service fees, because they would have had to follow the enhanced compliance steps of the best-interest contract exemption to avoid committing a prohibited transaction under the regulation. “The cost of them being in that space would have been a lot higher,” Ms. Ferenczy said. However, in its answer to question 7 of the recent FAQs, the DOL stated, “Nothing in the Rule or the Exemption alters the analysis of Advisory Opinion 97-15A.”

DOL #FiduciaryRule FAQ Part II Q7 confirms "fee offset" under AO 97-15A is still acceptable to avoid PT. No PT = no need for PTE i.e., BICE

— Jason C. Roberts (@JasonRobertsESQ) January 13, 2017

Some attorneys said the text of the final rule was clear in expressing the Frost letter would still be viable under the fiduciary rule. But the DOL likely felt the need to explicitly state this point in the second round of FAQs to eliminate any unintended confusion that arose from the first tranche. “People got concerned and they reiterated it,” said David Levine, principal at Groom Law Group. However, there's still confusion as to if advisers are able to use the Frost letter with respect to an aspect of BICE known as BICE Lite, a more streamlined, less-involved exemption available only to level-fee fiduciaries, Mr. Levine said. “There's a lot of concern you can't use BICE Lite with Frost,” Mr. Levine said. “It's still unclear” if advisers can receive third-party payments and still use that particular exemption, he added. One example in which this situation might arise is if advisers recommend themselves as consultants to a 401(k) plan for a level fee, which would partly be paid with revenue sharing, according to Mr. Levine. He questions, given available guidance, whether this practice, which “happens a lot,” would satisfy the standards of BICE Lite.