ERISA attorneys and benefits industry experts are encouraged by the final version of the Department of Labor’s new fiduciary rule, but they also note that the new requirements mean retirement plan advisers will need to rethink the way they work and get paid.
Rich McHugh, VP of Washington affairs for the Plan Sponsor Council of America, expects a movement toward flat or fixed fees for advisers. His comments were echoed by Michelle McCarthy, a partner with Fox Rothschild LLP, who believes commission and asset-based compensation will be curtailed or eliminated in the 401(k) space.
“Advisers are going to have to weigh the fees and commissions against how the asset’s going to actually perform,” she says, noting that the final rule will put the brakes on the extent to which they can tout their own products.
While adding long overdue consumer protections, the final rule could be an expensive proposition for the industry “as broker-dealer models transition to the new fiduciary standard,” suggests Brian Menickella, co-founder and managing partner of The Beacon Group of Companies and supporter of a uniform fiduciary standard.
He predicts that many brokers will become RIAs and be forced to consolidate as their margin for error in a challenging regulatory environment dramatically narrows. “Now may be a good time for employers to reevaluate adviser relationships and clarify their fiduciary duties toward a company’s 401(k) plan,” he adds.
There’s no doubt just how sweeping the final rule is in terms of how advisers will work and be paid in the future. As many as 80% of 401(k) platforms and compensation models “will actually be a prohibited transaction under the new rule as currently proposed,” Menickella maintains.
Fiduciary advisers will need to review both their client relationships and with their registered investment advisers (RIAs) and broker dealers, agrees David N. Levine, a principal at Groom Law Group.
Much attention has been devoted to the new rule’s Best Interest Contract Exemption (BICE), which essentially means that employers must now “recognize and understand what type of adviser they’re working with,” according to Menickella. That puts the employer at greater risk, he adds.
Time to make changes
Although the ruling will significantly alter the retirement industry’s landscape, the new compliance measures are phased in, “So there’s no need to panic,” says Levine. He notes that the measures don’t begin to take effect until April 10th of next year, and BICE compliance was pushed back for nearly another year after that. This timetable, he says affords advisers the time they need to alter their existing agreements.
Overall, the final rule’s impact will be somewhere in the middle of “the sky is falling” and “everything is completely free and clear,” concludes Levine.
McCarthy concurs, noting that there was a relaxing of some of the most draconian requirements, especially with respect to the asset classes that are covered and the disclosures that need to be made regarding future fund performance. “I think [the final ruling] scaled back some of those requirements and made it a little bit easier for advisers,” she says.
One very positive development is that the final rule allows employers and their advisers to continue to provide investment education without being considered fiduciaries,
McHugh says.
Another upside, according to Menickella, is that it “will continue to bring down costly fees associated with 401(k) plans benefiting the employees.” He expects the new rule will spark “many new ideas on how to better serve small investors and overall the system will evolve for the better because of it.”
Having a clearer understanding of an adviser’s role also should result in a stronger and more transparent relationship between plan sponsors and participants and the experts they hire to guide them, McHugh believes.
