Controversy, complicated legal wrangling and legislative maneuvering have been swirling around the Department of Labor’s (DOL’s) “fiduciary rule” governing financial advice given to retirement plan participants for years. Delays, modifications, phased effective dates, and the involvement of the Securities and Exchange Commission have left confusion and headaches in their wake. But essential elements are falling into place. Here’s a brief review of what plan sponsors need to know.
July 1, 2019, is the current projected deadline for full implementation of the rule. Based on the path this rule has taken, some changes could be made between now and then.
Opponents of the fiduciary rule who have been successful in delaying its implementation have warned that its upshot will be an exodus of brokers from the business of working with retirement plan participants. This may be true for advisors associated with small broker/dealer firms.
Brokers vs. RIAs
The fiduciary rule fundamentally governs the behavior of investment professionals in their dealings with retirement plan participants. This means that plan sponsors must understand the regulatory requirements covering such advisors. You’ll need to determine whether any investment professionals providing information to your participants meet the new regulations, and make sure participants are clear about the status of such advisors.
At its core, the fiduciary rule requires that financial advisors act, as retirement plan fiduciaries must, in the best interests of those they are advising. Investment advisors who work with relatively large retirement plans and their participants typically are registered investment advisors (RIAs). An RIA’s compensation isn’t based on selling investments to the plan or its participants. RIAs were minimally impacted by the fiduciary rule because they’re already required to act in a fiduciary capacity.
Commission-based brokers, in contrast, will need to make some changes. Generally, advisors paid on a commission basis are thought to be financially motivated to recommend investments that pay the biggest commissions, which may or may not be in retirement investors’ best interest. To work with retirement plan participants, commission-based brokers require an exemption from the fiduciary rule that would otherwise prevent them from doing so. It’s known as a best interest contract exemption (BICE) agreement. Under a BICE agreement, brokers/advisors attest that,
notwithstanding a theoretical conflict of interest with retirement plan participants, they’ll still look out for participants’ best interests.
Plan sponsor obligations
So what should plan sponsors have already done or do soon? First, know the regulatory status of financial advisors who work with you and interact with your plan participants. If the advisor is an RIA, your life is simpler. If the advisor’s a broker/dealer, you’ll need to make sure you obtain a BICE agreement. Before any interactions with the advisor, you and participants should read it carefully and sign the part in which you acknowledge that you have read it, understand it and accept its terms. This will give participants an important lens through which to consider any guidance the advisor gives.
Watch out for advisors providing plan asset distribution option recommendations to participants. A frequent practice that the fiduciary rule intends to curtail is having advisors recommend that participants roll their account balances into an IRA the advisor would manage, possibly using mutual funds with much higher fees than those in the 401(k) plan. If this were to occur and the participant harmed by it, he or she might be able to sue the plan. The rule sets an “impartial conduct standard” that, if satisfied, clears the way for advisor-recommended rollovers.
Finally, determine whether your plan’s recordkeeper is affected by the rule. The key is whether any investment education services or materials the recordkeeper furnishes participants stray into the investment advice territory. If so, the recordkeeper might need to satisfy the fiduciary rule’s requirements. The same applies to your own internal staff’s interactions with plan participants.
The time is now … really
Many employee benefit plans have watched the progress of this rule over the years. Whatever the ultimate fate of the fiduciary rule, it’s important for plan sponsors to understand whether the advisors who are guiding them are acting in a fiduciary capacity or not, and assess their recommendations in light of their status. Be sure to consult with your benefits and legal advisors to confirm you comply with the rule.