By now most advisors are aware one of the fundamental pillars of the fiduciary duty is the duty of care.
The duty of care is just one of the fiduciary duties required by the DOL Rule.
The Rule requires that any advisor making recommendations to purchase an IRA with qualified funds or exchange/transfer qualified funds to an IRA annuity, “will act at the time a recommendation is made with: the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, based on the client’s financial objectives, risk tolerance, financial circumstances, and needs, without regard to my financial or other interests.”
This standard is identical to, and will be interpreted consistently with decisions of courts of law under, the standards of 29 U.S.C. § 1104(a)(1)(A)(i) and (B).
“Recommended transactions will not cause me to receive directly or indirectly compensation for my services that is in excess of reasonable compensation within the meaning of § 408(b)(2) of the Employee Retirement Income Security Act of 1974, as amended, or § 4975(d)(2) of the Code,” the Rule reads.
Any recommended transaction, fees and compensation, material conflicts of interest, or any other relevant matters will not be materially misleading at the time they are made.
Fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries. These responsibilities include:
- Acting solely in the interest of plan participants and their beneficiaries and with the
exclusive purpose of providing benefits to them;
- Carrying out their duties prudently;
- Following the plan documents (unless inconsistent with ERISA);
- Diversifying plan investments; and
- Paying only reasonable plan expenses.
The duty to act prudently is one of a fiduciary’s central responsibilities under ERISA. It requires expertise in a variety of areas, such as investments. Lacking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions.
Prudence focuses on the process for making fiduciary decisions. Therefore, it is wise to document decisions and the basis for those decisions. For instance, in hiring any plan service provider, a fiduciary may want to survey a number of potential providers, asking for the same information and providing the same requirements.
By doing so, a fiduciary can document the process and make a meaningful comparison and selection. Following the terms of the plan document is also an important responsibility. The document serves as the foundation for plan operations.
Employers will want to be familiar with their plan document, especially when it is drawn up by a third-party service provider, and periodically review the document to make sure it remains current. For example, if a plan official named in the document changes, the plan document must be updated to reflect that change.
Kim O’Brien is a 35-year veteran of the insurance industry specializing in guaranteed annuities and life insurance. She is the current CEO of Americans for Annuity Protection and Founder of AssessBEST, Inc., a sales and compliance software system. Visit www.AAPnow.com or www.AssessBEST.com for more information.
This article is provided for educational and informative purposes only and not for the purpose of providing legal advice. Readers should consult with their own legal and compliance counsels to obtain guidance and direction with respect to any issue or question.
Contact Kim at firstname.lastname@example.org.
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