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Rule adds protections for retirement plan participants, increases plan sponsors’ liabilities
Sponsors of 401(k) and similar defined contribution retirement plans have at least an extra two months to make sure that any investment advice they arrange for plan participants is in the participants' best interests. Plan sponsors that fail to do so could face lawsuits by those same participants.
The U.S. Department of Labor (DOL)
announced a 60-day hold on a portion of the Obama administration's controversial
fiduciary rule. Under the terms of the extension, advisors to retirement investors will be treated as fiduciaries starting on June 9 rather than on April 10, 2017, as originally scheduled. In addition, the DOL announced that parts of the regulation related to the best interest contract (BIC) exemption, which allows so-called conflicted compensation to be paid under certain conditions, would be delayed until Jan. 1, 2018.
Between now and January 2018, the DOL will continue to review the rule and may suggest revising it or even withdrawing it, although the former is more likely.
The fiduciary rule requires that financial advisors giving investment advice comply with the Employee Retirement Income Security Act's (ERISA's) fiduciary or "best interest" standard, which has previously applied to plan sponsors and to advisors that chose to voluntarily abide by the standard.
Fiduciaries may only provide investment advice that's in a plan participant's best interest and not merely "suitable," may charge no more than reasonable fees for their services and must refrain from making misleading statements.
"While the delay may soothe some nerves, others are on edge, wondering how long the new administration's review will take, if it will result in substantial revision or rescission of the rule, not knowing how to best position themselves for any outcome on the DOL's decision, and what they should be doing in the meantime to comply with the law," said Dominic DeMatties, a partner at law firm Alston & Bird in Washington, D.C.
"The DOL fiduciary advice rule is complex," added Patrick DiCarlo, a benefits attorney in the firm's Atlanta office. "The delay in enforcement is helpful as the new administration reviews the new rule, but there is now even more uncertainty about how advisors and plans should be preparing."
[SHRM members-only toolkit:
Designing and Administering Defined Contribution Retirement Plans]
Attorneys have advised plan sponsors to review and, as needed,
revise their contractual agreements with investment advisors, including how participants' fees are structured.
"Most retirement plan sponsors have a hazy understanding about what a fiduciary is and if their advisor is acting as one," said Robert Lawton, president of Lawton Retirement Plan Consultants in Milwaukee. "Plan sponsors working with advisors who haven't been acting as fiduciaries will be approached by these advisors as they begin to define a new working relationship. They are likely to outline relationships that feature higher costs. There will also be additional paperwork to sign, which describes their fiduciary limitations."
"The HR person will have to look at the fees and the new contracts" from their financial services vendors, said Marcia Wagner, managing director of Boston-based Wagner Law Group. "If they are not getting new contracts and explanations of the relationships from vendors, there is probably a problem" with advisors complying with the new regulation.
Some fear that plan administrators will shy away from providing investment advice at all given the risk of lawsuits should a portfolio drop in value, leading participants to charge that the advice they received wasn't in their best interest.
"It is critical that employers be able to provide routine and helpful guidance through personal interaction of employees with both corporate human resources staff and outside service providers," said James A. Klein, president of the American Benefits Council, a Washington, D.C.-based trade group that represents employers.
Opponents of the rule also contend that paying advisors on a flat-fee or hourly basis—instead of allowing them to be reimbursed through commissions or by revenue-sharing payments from the funds in participants' accounts—will make their services too expensive for many businesses and participants, who will instead forgo investment advice. Advisors who already offer their services as fiduciaries dismiss these contentions as overblown.
DOL Seeks Further Comments
The DOL's announcement follows a Feb. 3
presidential memorandum that directed the department to examine the fiduciary rule to ensure that it does not impede Americans from accessing retirement information and financial advice. The DOL has requested comments on this and other issues the presidential memorandum raised.
"Many believe that the DOL will provide further extensions as it tries to digest numerous comments submitted both against and for the DOL rule," said Joseph S. Adams, a partner at law firm McDermott Will & Emery in Chicago. "This has forced many service providers—and their clients—to adjust their current business models."
"The DOL is clearly leaving the door open for additional delay as it sifts through the substantive comments, noting that 'any such review is likely to take more time to complete than a 60-day extension would afford,' " noted Erin Sweeney, a benefits attorney with Miller & Chevalier in Washington, D.C.
Financial Advice Transformed
Even if the fiduciary rule is eventually weakened or repealed, the changes that financial services firms and plan sponsors have already made—including renegotiated contracts and payment structures based on flat fees rather than commissions—are likely to remain in place, "given the increased scrutiny on how plans are managed and the returns they provide participants," said Trisha Brambley, CEO of Retirement Playbook Inc., a fee-based retirement advisory firm in Philadelphia.
"Regardless of the delay, the attention around the rule has undoubtedly changed the industry's thinking around its obligation to provide sound financial advice, with investors' best interests at heart," said Seth Rosenbloom, associate general counsel at Betterment for Business, a New York-based 401(k) advisory firm.
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