DOL Seeks Comments on Proposed Retirement Advice Rule

Imposing a fiduciary standard could change how investment advice is provided to plan participants

By Stephen Miller, CEBS April 15, 2015

updated 5/18/2015

The U.S. Department of Labor issued a proposed rule on April 14, 2015, that would impose a stricter fiduciary standard on those providing retirement investment advice. While some of the concerns behind the proposal involve conflicted investment advice to individual retirement account (IRA) holders, the sweeping rule would also change how advice is provided to participants in 401(k) and other defined contribution plans.

Under the DOL proposal, those advising holders of 401(k) plan accounts, IRAs and other self-directed retirement plan accounts must following the so-called “fiduciary standard” by only offering advice that can be shown to be in clients’ “best interest,” and by disclosing any potential conflicts of interest, as opposed to recommending products that are deemed to be broadly “suitable” but may reward the advisors more than competing, lower-fee investment funds.

Access to this retirement investment advice may be paid by employer plan sponsors as an employee benefit. Currently, employers can contract with independent third-party advisors who typically operate on a fee-only basis and adhere to the fiduciary standard, or (often at a lower cost) procure participant advice as part of a bundled package of services through the financial firm that administers their plan. Many of these brokerage and mutual fund firm representatives who provide retirement advice to 401(k) account holders adhere to the “suitability” standard and not the fiduciary “best interest” standard.

HR’s Oversight Responsibilities

Under the expanded definition of who is a fiduciary, HR professionals will have to use increased scrutiny when selecting individuals to provide services to the plan, Toni Pilzner, an attorney at McDonald Hopkins LLC, previously told SHRM Online. “They need to make sure that [individuals giving investment advice] are competent to provide a fiduciary level of services, and they have to make sure that [advisors] understand what their responsibilities are and that they are willing to accept that liability and responsibility.”

Pilizner advised, “Once the final regs are out and we have an effective date, that’s when HR professionals need to start looking at their contracts, talking to their service providers and saying, ‘Are you going to come up to that standard? Are we going to have to look to a new provider, or are you going to be willing to renegotiate your agreement with us?”

Advisors who receive payments from companies selling funds they recommend, or who otherwise receive compensation that creates conflicts of interest, will have to rely on one of several proposed prohibited transaction exemptions under the proposal. These exemptions would allow advisors and account service providers to continue arrangements such as receiving revenue-sharing fees from mutual funds, but only if these fees are properly disclosed to their clients.

The proposed rule was originally released for a 75-day public comment period, which at the request of lawmakers was subsequently extended to 90 days (through July 21, 2015), to be followed by a public hearing. After that event, the comment period will reopen for an additional 30 to 45 more days prior to the issuance of a final rule.

Disclosing Conflicts of Interest

“If fiduciary advisors and their firms enter into and comply with such a contract, clearly explain investment fees and costs, have appropriate policies and procedures to mitigate the harmful effects of conflicts of interest, and retain certain data on their performance, they can receive common types of fees that fiduciary advisors could otherwise not receive under the law. These include commissions, revenue sharing, and 12b-1 fees,” according to a DOL statement. “If they do not, they generally must refrain from recommending investments for which they receive conflicted compensation, unless the payments fall under the scope of another exemption.”

The proposal also includes other new exemptions and updates some exemptions previously available for those who provide investment advice to plan sponsors and participants. For example, the proposal includes a new “low-fee exemption” that would allow firms to accept conflicted payments, such a revenue sharing, when recommending the lowest-fee products in a given product class.

Significantly, the proposal also carves out general investment education from fiduciary status. Sponsors of 401(k) and similar workplace plans had expressed concern that a tighter fiduciary standard might prevent employers from providing plan participants with access to general education about retirement investing when delivered by representatives of financial services firms.

Also exempt under the proposal would be sales pitches made by financial firms to large plan fiduciaries who are financial experts, and appraisals or valuations of the stock held by employee-stock ownership plans.

Investment Education and Asset Allocation Models

A carve-out under the proposed rule for general investment education would allow a plan sponsor or service provider to offer a broad array of investment information to a plan, participant or beneficiary “without stepping into a fiduciary role, so long as specific fund recommendations are not included,” Buck Consultants pointed out. “The investment information could include information about an appropriate mix of stocks and bonds based on age and income, how to estimate future retirement income needs, historic returns of different asset classes, and specific options offered by the plan—including a description of objectives, risk and return characteristics of each of those options, as well as the different forms of distributions, including rollovers, annuitization, and other forms of lifetime income payment options” the consultants noted.

The information could also include asset allocation models and use interactive technologies, but only under certain conditions. “Breaking away from current rules under Interpretive Bulletin 96-1, this [investment education] carve-out would not cover asset allocation models that refer to specific investment products under the plan or IRA, even when accompanied by a statement of other investment alternatives,” Buck Consultants explained. “According to the DOL, model investment allocations that identify specific investment alternatives constitute tailored, individualized investment recommendations that are subject to a fiduciary standard.”

Also exempt under the proposal would be sales pitches made by financial firms to large plan fiduciaries who are financial experts, and appraisals or valuations of the stock held by employee-stock ownership plans.

Differing Responses

“Current rules contain loopholes that enable many financial firms and advisors to put their own financial interests ahead of the interests of their customers,” Barbara Roper, director of investor protection at the Consumer Federation of America, said in a statement. “Release of this proposed rule for public comment is an essential step in the effort to ensure that the interests of retirement savers are protected,” she added.

Similarly, the Public Investors Arbitration Bar Association, a trade group for lawyers who represent claimants in securities litigation, issued a statement saying it was encouraged by the DOL’s fiduciary rule proposal and that “It’s time to put an end to all of the game-playing and the loopholes in financial advice that cost Americans billions of dollars in retirement savings every year.”

“Only positive changes are likely for plan sponsors as a result of any new fiduciary requirements issued by the DOL,” contended Robert C. Lawton, president of Lawton Retirement Plan Consultants, a fiduciary advisory firm, in an online commentary. “The new proposal will provide greater transparency regarding fees and a uniform definition of who is a fiduciary. Many plan sponsors are currently confused about whether their investment advisor is or isn't a plan fiduciary. Should these regulations become final, this is an issue that plan sponsors will no longer have to worry about since any advisor would be a fiduciary.”

However, some speaking on behalf of the financial industry expressed caution regarding the proposed rule. Dale Brown, president and CEO of the Financial Services Institute, said that his trade group was “disappointed” that the Office of Management and Budget (OMB) only took 50 daysto review this highly controversial rule that could negatively impact millions of investors.” On average, he said, DOL rules are reviewed by OMB for 117 days.

“If adopted, the DOL proposal may significantly increase compliance costs for [financial] firms and their retirement businesses,” noted an overview by the Wagner Law Group. Those costs could be passed along to plan sponsors or participants.

For advisors who work with 401(k) plans, “One emerging option is to encourage the plan sponsor to add a cost-effective financial wellness or education program for those with simple investment issues or those with minimal assets and significant debt and budgetary issues,” commented Michael Case Smith, managing director of Edge 401k Funds, in a blog post at the website Financial Planning.

“Finalization of the rule, if it occurs, could take six months or much longer, given the extensive lobbying that everyone expects to take place,” observed Ron A. Rhoades, J.D., CFP, a frequent writer on fiduciary obligations, in a separate Financial Planning blog post.

“This is an ambitious proposal that makes a genuine attempt to eliminate or mitigate the effects of conflicts of interest in all retirement plans,” according to an evaluation from Pentegra Retirement Services. “We in the retirement industry now have the obligation to find the flaws and unintended consequences in the proposal and work with our partners in government to achieve a final regulation and/or effective legislative alternatives that truly serve the country's best interests.”

Advising on 401(k)-to-IRA Rollovers: New Compliance Burdens

One area of DOL scrutiny has been “conflicted” advice by financial advisors to retiring 401(k) participants, who have the option to roll over their 401(k) nest egg into an IRA. “While initial concerns about preserving the ability for 401(k) participants to work with the advisor of their choice on rollovers appear to be addressed in the new proposal, the new compliance regimen looks to be significant, adding cost and complexity to the process. Among other things, this includes written contracts with multiple signatures, as well as initial and annual disclosures,” said a statement from the National Association of Plan Advisors (NAPA).

“Requiring so many layers of duplicative disclosures could be counter-productive—and cost-prohibitive to offering this critical level of support to 401(k) participants at a crucial point in their retirement planning,” cautioned Brian Graff, NAPA’s executive director. “We remain concerned that the compliance costs may outweigh the benefits.”

Earlier Proposal Withdrawn

In October 2010, the DOL initially proposed a rule to update and expand the definition of fiduciary under the Employee Retirement Income Security Act to cover more broadly those who provide retirement investment advice. That proposal encountered strong resistance from the financial services industry, which claimed its added compliance costs—and the increased legal liability for advisors—would limit both general financial education and individual advice available to account holders with modest savings.

Subsequently, in September 2011, the DOL announced it would revise and reissue its proposed fiduciary rule to “protect consumers while avoiding unjustified costs and burdens.” The DOL also indicated its re-proposed rule would only impose fiduciary status on those advisors who provide “individualized” advice to plan clients, which would allow advisors to provide general education on retirement savings to plan participants without triggering fiduciary duties.

While the revised proposal was originally expected sometime in 2013, it was subject to repeated delays attributed to disagreements within the DOL over the scope of the revised rule and available exemptions.

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.

Related SHRM Article:

DOL to Re-Propose Fiduciary Rule for Retirement Advisors, SHRM Online Benefits, February 2015

Related Resource:

DOL's New Proposed Fiduciary Definition: Start Preparing Now, Winstead PC, May 2015

Related SHRM Video:


Fiduciary Selection

Toni Pilzner, attorney at McDonald Hopkins LLC, explains how the Department of Labor's effort to expand the definition of a retirement plan fiduciary may increase HR's oversight responsibilities.

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