Appendix of Additional Concepts and Terms
Conflicts of interest
An investment advice provider has a conflict of interest when the provider is paid more to recommend certain products or accounts rather than to recommend what is in your best interest. You might be unaware of these payments, particularly if information is hidden in fine print or not disclosed at all. These fees can create an incentive to make recommendations that generate the highest fees for the investment advice provider, rather than the best investment return for you. Hiring a fiduciary, as opposed to a non-fiduciary, will help ensure that your interests are protected from harmful conflicts of interest.
Conditions
The exemption requires investment advice providers that rely on its terms to meet conditions designed to protect your interests. The conditions should ensure that you receive investment advice that is in your best interest and is insulated from the harmful effects of conflicts of interest. One of the conditions of the exemption requires your investment advice provider to give you a written statement that they are a fiduciary under the federal laws specifically applicable to retirement accounts. As described in the previous question, this written statement confirms that the investment advice provider is a fiduciary under these laws and is obligated to give you advice that is in your best interest. The exemption also requires fiduciary investment advice providers to give you additional information in writing, including a description of the services they are providing and certain conflicts of interest. The exemption’s most important conditions require that investment advice providers:
- Give advice that is prudent,
- Give advice that is loyal,
- Avoid misleading statements about conflicts of interest, fees, and investments,
- Follow policies and procedures designed to ensure that they give advice that is in your best interest,
- Charge no more than is reasonable for their services, and
- Give you basic information about conflicts of interest.
Fiduciary
Under Title I of ERISA and the Internal Revenue Code, a fiduciary is obligated to follow certain rules that prohibit harmful conflicts of interest. A fiduciary that relies on the Improving Investment Advice for Workers & Retirees exemption must:
- Give advice that is prudent and loyal,
- Avoid misleading statements about conflicts of interest, fees, and investments,
- Follow policies and procedures designed to ensure that they give advice that is in your best interest,
- Charge no more than is reasonable for their services, and
- Give you basic information about conflicts of interest.
Fiduciary investment advice providers that avoid conflicts of interest are not required to rely on an exemption. However, if your investment advice provider says they are not a fiduciary with respect to your retirement account – or that they have conflicts of interest but are not relying on the Department’s Improving Investment Advice for Workers & Retirees exemption -- you should carefully consider hiring another investment advice provider.
Prudent
This means meeting a professional standard of care requiring them to investigate and evaluate investments, give advice, and exercise sound judgment in the same way that knowledgeable and impartial professionals would.
Loyal
This means never putting their own financial interests (or those of the firm for whom they work) ahead of yours when making recommendations.
Policies and Procedures
These help to reduce the dangers posed by conflicts of interest and ensure that they make recommendations that are in your best interest.
Proprietary Products
In fact, some only offer proprietary products. Sometimes, investment advice providers will make more money for their firm by recommending these products, instead of recommending competing investments that may be more in your interest. This could be the case when a competing investment has similar returns but pays the investment advice provider lower fees.
Special protections under Title I of ERISA
These protections include the ability to assert claims in court for violation of your legal rights as a plan participant.
Change upon rollover
For example, if your fees significantly increase after the rollover, you’ll end up with less savings at retirement. There are many other factors to consider, including differences in available investments, services, and distribution options. So, if your investment advice provider recommends a rollover, ask a lot of questions so that you can be sure you understand the reasons for the recommendation, and whether it’s right for you. Also, be sure to give your investment advice provider access to all the information available on the investment options and features of your employer-sponsored plan, so that the provider will have sufficient information to make a sound recommendation. Many 401(k) plan administrators (often your employer) are required to provide plan, investment, and fee information to you. This information may be sent to you by mail or you may have access through a website.
Model language
When we provide investment advice to you regarding your retirement plan account or individual retirement account, we are fiduciaries within the meaning of Title I of the Employee Retirement Income Security Act and/or the Internal Revenue Code, as applicable, which are laws governing retirement accounts. The way we make money creates some conflicts with your interests, so we operate under a special rule that requires us to act in your best interest and not put our interest ahead of yours.
Under this special rule’s provisions, we must:
- Meet a professional standard of care when making investment recommendations (give prudent advice);
- Never put our financial interests ahead of yours when making recommendations (give loyal advice);
- Avoid misleading statements about conflicts of interest, fees, and investments;
- Follow policies and procedures designed to ensure that we give advice that is in your best interest;
- Charge no more than is reasonable for our services; and
- Give you basic information about conflicts of interest.
