Following years of deliberation and intensive industry lobbying, the Department of Labor today released the final version of its new fiduciary standard for advisers working with retirement accounts. The final rule encompasses anyone giving investment advice, but—significantly—allows employers and their advisers to continue to provide investment education without being considered fiduciaries.
Six years in the making, the new regulation imposes a fiduciary standard on any individual receiving compensation for retirement investment advice, including brokers and insurance agents who are currently held to a lesser standard. The updated rule, now known as the conflict of interest standard, begins to take effect in April 2017 and will be fully in force by January 2018.
In a briefing for reporters, Secretary of Labor Thomas Perez called the new standard a “fundamental principle of consumer protection,” since it requires anyone giving retirement investment advice to act in their client's best interests. For advisers, this includes clearly and prominently disclosing any conflicts of interest, including fees and other types of compensation.
Quote“Plan sponsors working with advisers who haven't been acting as fiduciaries will be approached by [others] to define a new working relationship, [but these] are likely to feature higher costs.”
Education, however, is not included in the definition of retirement investment advice, freeing advisers and plan sponsors to continue to provide general education on saving for retirement without assuming fiduciary responsibilities. Also, plan sponsors with more than $50 million in plan assets can continue to offer investment advice, if certain conditions are met, and smaller plans can do the same using best-interest contract exemptions.
Positives, but also pressures
While the ruling was viewed by many in the benefits industry in a positive light, it was also seen to put new pressure on employers and their advisers.
“The impact on plan sponsors is nearly all positive,” says Robert Lawton, president of Lawton Retirement Plan Consultants. But most retirement plan sponsors have only “a hazy understanding about what a fiduciary is and if their adviser is acting as one,” he continues. “Plan sponsors working with advisers who haven't been acting as fiduciaries will be approached by [others] to define a new working relationship, [but these] are likely to feature higher costs.”
“The new regulation puts additional responsibility on employers, as they must recognize and understand what type of advisers they’re working with,” agrees Brian Menickella, co-founder and managing partner of The Beacon Group of Companies and an outspoken proponent of the fiduciary rule. “It will be easier now that this rule was implemented,” he adds, “but they still need to be cognizant of signing a BIC exemption.”
As defined under the new DOL standard, when employers sign a Best Interest Contract Exemption, they are acknowledging that their advisers may have conflicts of interest because of the way they are compensated. While a BICE clears the way for the employer to pay the adviser a commission, or a higher fee, Menickella says it also “puts the employer at an additional risk – as opposed to not having to sign a BICE in the first place.”
“The final regulations redefining ‘fiduciary’ include a number of improvements, but leave employers concerned about their ability to engage employees in their benefit programs,” American Benefits Council president, James Klein, said in a statement. He listed the positives as the grandfathering of past advice, recognizing that valuations are not fiduciary acts and the exclusion of health and welfare plans, although he noted that “some details of this exemption are left unclear.” Health, disability and term life insurance policies are not subject to the fiduciary rule, according to Menickella.
Quote“The final regulations redefining ‘fiduciary’ include a number of improvements, but leave employers concerned about their ability to engage employees in their benefit programs."
Prior to the final ruling, one of the real concerns for employers was that education materials that identified investments by name would be considered fiduciary advice, says Vanessa Scott, an attorney with Sutherland Asbill & Brennan in Washington D.C. That posed a problem for employers sponsoring 401(k) plans, since the educational materials they offered from their providers frequently listed the names of funds included in the plan. But under the final rule, she says, “employers can give a little more specific information and can name those funds. That’s something we were hoping for and that’s a good thing.”
Another beneficial change in the final ruling included delaying the requirement for new formal policies, procedures, disclosures and contract provisions until January 1, 2018, observes Erin Sweeney, an attorney at Miller & Chevalier, a Washington D.C. law firm. In addition, she says, the DOL eliminated some of the most contentious requirements from its original proposal, including requirements to develop investment projections and distribute an annual disclosure to investors.
In another notable change, Sweeney adds, the DOL eliminated the list of approved investments and indicated that advisers are permitted to provide investment advice with respect to all asset classes to investors.
In the wake of the ruling, it is crucial for employer to turn their attention to the benefits industry’s changing landscape, concludes Lawton. “Those brokers and advisors who weren't acting responsibly as fiduciaries will be re-evaluating their business models,” he adds. For employers, “Now may be a good time to re-evaluate the relationship you have with your advisor—at the very least to gain clarity on his or her fiduciary relationship with your 401(k) plan.”
Andrea Davis, Bruce Shutan and Melissa Winn contributed reporting to this article.
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