Start of Fiduciary Rule Application Means It's Time to Ensure Compliance

Plan sponsors could be liable for advice that is not in participants' best interest

By Stephen Miller, CEBS May 25, 2017
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updated on Aug. 18, 2017

Update: DOL Requests Transition Period Extension 

The U.S. Department of Labor (DOL) proposed to extend the transition period for fully implementing the fiduciary rule until July 1, 2019, including the applicability date for the best interest contract (BIC) exemption—also called the BICE—which allows so-called conflicted compensation to be paid under certain conditions that some financial advisors claim are unduly burdensome. The phased implementation of the rule, which began on June 9, 2017, was set to end on Jan. 1, 2018.

The extension would extend phase two of the fiduciary rule's implementation by 18 months. Phase two, which completes the implementation process, deals primarily with the BIC and other prohibited transaction exemptions. During the extension period, the DOL may seek changes to ease compliance requirements for financial advisors.

 

In the wake of Labor Secretary Alexander Acosta's announcement that the Department of Labor would begin to implement the Obama administration's controversial fiduciary rule, retirement plan sponsors should ensure that any investment advice they help plan participants receive isn't conflicted due to advisor fees.

In a Wall Street Journal op-ed posted online May 22, Acosta wrote that the fiduciary rule will begin to take effect as presently scheduled but that the DOL will seek public input on subsequently revising it.

In April 2017, the DOL put a 60-day hold on implementing the rule, delaying the date by which retirement advisors must act as fiduciaries from April 10 to June 9, 2017. The DOL also delayed until Jan. 1, 2018, parts of the regulation related to the best interest contract (BIC) exemption—also called the BICE—which allows so-called conflicted compensation to be paid under certain conditions that some financial advisors claim are unduly burdensome. Commissions and revenue-sharing payments are examples of conflicted compensation.

Many financial service providers had called for a further delay of the rule, saying its requirements are overly burdensome on advisors, increase the likelihood of participant lawsuits, and will require participants or plan sponsors to pay higher flat fees for advice.

Acosta, however, wrote, "We have carefully considered the record in this case, and the requirements of the Administrative Procedure Act, and have found no principled legal basis to change the June 9 date while we seek public input. Respect for the rule of law leads us to the conclusion that this date cannot be postponed."

He added, "Trust in Americans' ability to decide what is best for them and their families leads us to the conclusion that we should seek public comment on how to revise this rule."

At the same time, the DOL issued two new pieces of guidance:

  • The Temporary Enforcement Policy on Fiduciary Duty Rule states that during the phased implementation period ending on Jan. 1, 2018, the DOL won't pursue claims against fiduciaries "who are working diligently and in good faith to comply with the fiduciary duty rule and exemptions, or treat those fiduciaries as being in violation of the fiduciary duty rule and exemptions."

  • Conflict of Interest FAQs (Transition Period) is a new set of frequently asked questions (FAQs) and answers to help financial services firms implement the rule.

"While the June 9 applicability date is firm, it is not beyond the realm of possibility that the date on which the transition period ends, Jan. 1, 2018, could be delayed," said Marcia Wagner, managing director of Boston-based Wagner Law Group. "The FAQs indicated that the DOL is still conducting the review of the fiduciary rule mandated by the White House and that the DOL intends to issue a new Request for Information regarding possible changes to the fiduciary rule."

[SHRM members-only toolkit: Designing and Administering Defined Contribution Retirement Plans]

HR's Role—and Risks

Plan sponsors that arrange for participants to receive advice that is conflicted or otherwise not in their best interest could face class-action lawsuits, benefits attorneys said. "Most retirement plan sponsors have a hazy understanding about what a fiduciary is and if their advisor is acting as one," warned Robert Lawton, president of Lawton Retirement Plan Consultants in Milwaukee. "The HR person will have to look at the fees and the new contracts" from their financial services vendors and ensure that they meet the new standard, Wagner advised.

The fiduciary standard requires that an advice provider act in the best interest of plan participants, receive only reasonable compensation and refrain from making misleading statements, said Erin Sweeney, a benefits attorney with Miller & Chevalier in Washington, D.C. "Notably, the DOL advised that the agency would not enforce the impartial conduct standards until after Jan. 1, 2018, provided the advice providers are 'working diligently and in good faith to comply,' " she noted.

The DOL also clarified that until Jan. 1, "as long as advice providers adhere to the impartial conduct standards in making recommendations, that the advice providers would not violate existing exemptions even if new compensation systems are not yet implemented," Sweeney said.

However, "As DOL acknowledged, its enforcement policy does not bar participant lawsuits during the transition period," explained Julia Zuckerman, J.D., a director at Conduent HR Services, and Marjorie Martin, a principal at Conduent's Knowledge Resource Center. "This means that, as of June 9, 2017, participants can bring class-action lawsuits against fiduciaries under the final rule for breaches that occur on or after that date."

In crafting the rule, "the DOL aimed to broaden the scope of fiduciary investment advice and thereby make it easier for it, and participants, to establish fiduciary liability," they added. "Although the DOL's focus on compliance assistance during this transition period is helpful, plan sponsors may still face litigation risk via participant lawsuits."

"With the fiduciary rule's applicability date now locked in, sponsors should understand the effect of the rule on everyday interactions with plan participants," said Dominic DeMatties, a partner at Alston & Bird in Washington, D.C. "In addition, sponsors should keep an eye on, and may wish to be involved in, the continuing regulatory review and process associated with the rule at the Department of Labor for additional changes, in particular as the next enforcement deadline, Jan, 1, 2018, approaches."

Unless the new fiduciary rule is repealed or replaced, "it's critical...for 401(k) plan sponsors to take it seriously, " noted Chris Carosa, chief contributing editor at FiduciaryNews.com. "They should assess their current relationships...and determine the relative risks associated with them" in light of the fee provisions that the fiduciary rule addresses. "While plan sponsors won't be able to determine the exact nature of their potential liability, they will at least be in a position to take an inventory of their possible exposure."


Two Views on the Fiduciary Rule

"Access to retirement products and services will decrease, retirement services will become more expensive [and] investment choices and options will be limited" if the fiduciary rule takes effect, the U.S. Chamber of Commerce contended. The chamber referenced a 2017 survey by the National Association of Insurance and Financial Advisors that found "nearly 90 percent of financial professionals believe consumers will pay more for professional advice services" with the rule in place.

But "brokers advising people seeking advice about retirement investments [currently may] steer clients toward the products that make themselves more money at the expense of their clients' needs," argued ThinkProgress, which advocates for liberal public policies. The group cited Obama administration claims that "Americans lose an estimated $17 billion a year to this conflicted advice every year."


Related SHRM Articles:

How the Fiduciary Rule Affects Retirement Plan Sponsors, SHRM Online Benefits, April 2016

Fee Allocation in 401(k) Plans: Choose Your Model, SHRM Online Benefits, February 2016

Related Resource:

This is why 401(k) plan sponsors can't ignore the new fiduciary rule, FiduciaryNews.com, June 2017


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