Breaking Down the DOL’s Final Fiduciary Rule
On April 6, 2016, the Department of Labor (DOL) released its final rule that redefines who is considered a fiduciary of an employee benefit plan under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code. The final rule focuses on those who give investment advice to a plan, its participants or beneficiaries – including retirement accounts (IRAs) and 401(k) plans – and expands the group who may be considered a fiduciary.
This rule is aimed at the financial advisor community, but an employer who may have freely provided recommendations and information in the past could now be on the hook as a fiduciary for this same behavior. At the heart of the rule is providing advice in the best interest of the participant/beneficiary for a level fee and any exceptions to this must be spelled out in a detailed disclosure.
Providing investment advice – communication in the form of a recommendation – is what differentiates a non-fiduciary from a fiduciary under the new regulation. Its content, context and presentation would reasonably be viewed as a suggestion for the recipient to engage in or refrain from taking a particular course of action.
This expanded definition of investment advice is growing in importance as employers sponsoring plans find their employees becoming encouraged to leave funds in the plan rather than roll them into an IRA, as that may be deemed the best suited course of action for a particular participant. Advisors will now find themselves having to develop extensive documentation every time they work with an IRA rollover to justify they are working in their clients’ best interest versus the old standard of just showing that a particular investment being recommended to a client was suitable for them.
On Feb. 3, 2017, President Trump sent a memo to the acting secretary of the DOL to review the rule and, if findings warrant, proceed with a new rulemaking to change or overturn it. On April 4, 2017, the DOL formally delayed the first applicability date when advisors and their firms must comply with the fiduciary rule: the applicability date was moved from April 10, 2017 to June 9, 2017. There is a second applicability date when controversial disclosure requirements under the rule (Best Interest Contract Exemption) take effect. It remains unchanged until Jan. 1, 2018.
The delay in the rule’s first applicability date was delivered with the DOL’s intention to use the transition period to conduct the rule review ordered by the president. The investment advisory industry has been poring over this rule and its potential impact on their business since the rule was proposed.
There has been a large amount of activity in the investment advisory industry with a focus on streamlining investment products for 401(k) plans and IRAs and finding ways to reduce fees. At the same time, finding ways to limit liabilities for the investment advisors providing and determining how to deal with the onslaught of additional compliance requirements are on the horizon with this new rule. This is changing the landscape for the investment advisory community as firms create new internal rules and standards for their advisors to follow that will in turn impact how advisors interact with their clients.
The delay in the rule and the potential for changes (or the ultimate scrapping of the rule) could mean more work for plan sponsors.
IN THE MEANTIME…
Here is what plan sponsors should consider:
- Understand and review your fiduciary “best practices,” including the duty to monitor the plan’s service providers.
- Benchmark the fees of the plan and monitor investment options following a documented process anchored by an investment policy statement.
- Best Practices should focus on improving outcomes, especially for participants.
- Review your plan design to ensure your plan is helping you attract and retain employees.
- Understand that this rule is directed at investment advice and is not confined to retirement plans and IRAs—health savings accounts (HSAs) with investment components are subject to this rule, too.
- If the DOL Fiduciary Rule is further postponed or scrapped, the burden of closely watching and assessing the performance of service providers will fall even more on the shoulders of plan sponsors and IRA participants.
- Review any educational materials provided by investment advisors to help avoid inadvertent recommendations regarding rollovers and distributions.
As the DOL Fiduciary Rule takes form, it will become more important to have a clear understanding of the role your financial professional(s) play in the oversight of your qualified retirement plan and IRAs. Will they still be able to provide you the support you need while placing your best interest ahead of their own?
Ryan Sullivan is a principal at Rehmann and provides direction to all financial service divisions of Rehmann Financial. He has worked with individuals and families, building creative strategies to help clients approach and reach their financial and life goals. Contact him at firstname.lastname@example.org. Securities offered through Royal Alliance Associates, member FINRA/SIPC. Investment advisory services offered through Rehmann Financial, a Registered Investment Advisor not affiliated with Royal Alliance Associates.