DOL’s Fiduciary Rule Garners Support, Draws Concern

If 401(k) plan participants like their financial advice, will they be able to keep it?

By Stephen Miller, CEBS Apr 11, 2016
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The U.S. Department of Labor’s (DOL’s) fiercely debated final rule on conflicts of interest in retirement advice, published in the Federal Register on April 8, was welcomed by critics of the financial services industry and greeted with caution by advocates of retirement plan sponsors, who tended to express guarded relief that it wasn’t worse.

As SHRM Online reported (see “How the DOL Fiduciary Rule Will Affect Plan Sponsors”), the final rule applies the so-called fiduciary standard under the Employee Retirement Income Security Act (ERISA) to retirement plan investment advisors, requiring that investment advice provided to plan sponsors and participants be in the recipients’ best interest, and that advisors disclose any potential conflicts of interest.

Currently, many retirement plan advisors associated with mutual fund and brokerage firms that administer 401(k) and similar plans are held to a “suitability” standard, meaning recommended investment products must fit a client’s general needs and risk tolerance but may result in greater rewards for the advisor than competing, lower-fee investments would.

“While the DOL’s new fiduciary rule is primarily meant to protect retirement plan participants from conflicted investment advice, it will also help plan sponsors meet their fiduciary responsibilities by rooting out conflicts of interest that could otherwise go unnoticed and result in personal liability,” commented Eric Droblyen, president Employee Fiduciary, a 401(k) plan provider for small businesses headquartered in Mobile, Ala.

“We congratulate the Department of Labor for crafting a rule that protects American savers from self-serving advice and informs them of the real cost of what they are buying,” said Teresa Ghilarducci, professor of economics at The New School in New York City and a longtime advocate of retirement-advice reforms.

Anthony Webb, research director of the New School’s Retirement Equity Lab, added that concerns the regulation could deprived households of valuable financial advice were unfounded. The financial services industry “is not going to walk away from $1.7 trillion of assets and perhaps $17 billion of revenue rather than comply with the rule,” he said.

Critics have a different view: “The final regulation will still require most small business plan advisors to change their business models, incur major new transition and compliance costs, and in many cases, subject themselves to serious litigation risks. This cost will be paid by small businesses and their employees in the form of higher costs, reduced choices, and less access to advice,” according to a U.S. Chamber of Commerce issue brief.

Conflicted Compensation

A key issue addressed by the rule is acceptable pay arrangements for advisors. The final rule provides for a best interest contract (BIC) exemption to allow so-called conflicted compensation to be paid under certain conditions. The BIC exemption involves disclosure requirements, including a statement of the types of compensation the firm expects to receive from third parties in connection with recommended investments.

That would permit some advisors, within those constraints, to continue receiving payment from mutual fund revenue-sharing arrangements—the transfer of revenue from selected investment funds to service providers, generally through so-called 12b-1 fees. Eliminating revenue-sharing had been an objective of reform advocates.

On revenue-sharing, “I believe the DOL compromised in order to best defend the rule against an industry lawsuit claiming that the DOL failed to diligently consider thoughtful comments from stakeholders and failed to adequately evaluate the costs vs. the benefits,” said Charles Field, co-chair of law firm Sanford Heisler Kimpel's financial services litigation practice in Washington, D.C. Still, he added, “A half a loaf is better than none.”

Others argue that while revenue-sharing fees are not banned outright, advisors will be bound by the fiduciary standard and the new requirements to disclose these arrangements and the possible conflicts of interest they present. “The DOL is still casting a wide net, indicating they think these types of common arrangements may well fall within the prohibitions,” said Erin Sweeney, of counsel at Miller & Chevalier in Washington, D.C.

Litigation Risks

Even under the current suitability standard, revenue-sharing has been cited in class-action lawsuits in which the plaintiffs charged that the practice results in investment menus with high-fee funds that unfairly enrich mutual fund providers and plan sponsors at the expense of participants. Yet, “over 80 percent of plans still have some level of revenue-sharing today,” Ross Bremen, a partner and defined contribution strategist at Boston-based plan advisory firm NEPC, told SHRM Online last October. “Plans that have no revenue-sharing tend to be the very large plans” that are most sensitive to fee arrangements that might trigger lawsuits, he noted.

Also, smaller plans have relied on revenue-sharing as a way of keeping administrative costs in check.

Under the stricter fiduciary standard, the risk of lawsuits targeting service providers—and the plan sponsors responsible for overseeing them—could become much greater. “While the Department of Labor addressed many of the concerns expressed during the comment period, the final regulation still constitutes a dramatic expansion of fiduciary status and creates a lot of uncertainty,” said Patrick DiCarlo, an attorney with Alston & Bird in Atlanta. “There will almost certainly be a wave of expensive and unpredictable litigation. One concern with the new definition of ‘fiduciary’ is that it’s not clear that the BIC exemption will be enforceable. Another issue is that the DOL has included some statements about the scope of fiduciary liability that are not supported by ERISA.”


“There will almost certainly be a wave of

expensive and unpredictable litigation.”


“Ultimately, the risk here is without clearer guidelines from the DOL, interpretation may be left to the courts,” warned Chris Carosa, chief contributing editor to FiduciaryNews.com.

Similarly, “The new regulations require the fiduciary to demonstrate compliance with a ‘prudent’ standard. What are the specific details—the objective requirements—of this new prudent standard? They’re not defined, which increases the probability of meritless and frivolous litigation,” Don Trone, a fiduciary standards advocate and consultant at Mystic, Conn.-based 3ethos, wrote at RIABiz.

Employers’ Worries

“The final regulations redefining ‘fiduciary’ include a number of improvements [over the DOL’s proposed rule] but leave employers concerned about their ability to engage employees in their benefit programs,” said James A. Klein, president of the American Benefits Council, a Washington, D.C.-based trade group that represents employers.

For instance, new limitations on advisors’ pay arrangements could bring an end to offering participants no-cost investment advice that’s bundled together with other services, such as record-keeping, from firms that administer workplace retirement plans, some fear.

Also, while the final rule allows advisors to provide general education on retirement saving without triggering fiduciary duties and liabilities, specific investments may only be included in asset allocation models or other educational materials if the investments are selected or monitored by a plan fiduciary. Given the higher risk of liability for making investment recommendations that later drop in value and are then challenged as not having been in the participants’ best interest, some fear that plan administrators will shy away from providing advice altogether.

“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,” Klein said.

On another matter, the DOL adopted a phased implementation approach to the final rule, with a transition period from an April 10, 2017, applicability date to Jan. 1, 2018, when additional conditions apply and all new systems and procedures must be in place.

“The bifurcated effective date of April 2017 and January 2018 is a helpful step. But given the number of open issues and need for further refinements, we remain concerned that this will not be sufficient to implement the rules because so many operational processes, materials and agreements are affected,” Klein said.

Legislation Looms

In Congress, Republican leaders of the Housed Education and the Workforce Committee and the Ways and Means Committee issued a statement saying, “We continue to have serious concerns that these new rules will make it harder for low- and middle-income families to receive basic education about retirement savings and will create new hurdles for small business owners who want to offer their workers retirement options.”

Now that the DOL has put forward its final rule, the statement said, “We plan to review it thoroughly. We remain committed to using the tools we have to help all Americans retire with the financial security and peace of mind they deserve.”

Among those tools are legislative proposals to limit the sweep of the final rule, including two companion measures—the Affordable Retirement Advice Protection Act and the SAVERS (Strengthening Access to Valuable Education and Retirement Support) Act—which were passed out of committee earlier this year.

Sponsors of the proposed legislation argue it would allow more flexibility than the DOL’s rule regarding how advisors are paid for their services, making it more likely that if participants like the investment advice they currently receive, they could keep it.

But during a March hearing before the House Education and the Workforce Committee, DOL Secretary Thomas Perez said the proposed bills “move the status quo backward in material respects. We need to move forward.”

Update: Presidential Veto Protects Rule

On April 28, 2016, the U.S. House of Representatives passed—by a vote of 234 to 183—a resolution to block the Department of Labor’s fiduciary rule from taking effect. But a statement from the White House’s Office of Management and Budget said, “It is essential that these critical protections go into effect. If the President were presented with [a measure to overturn the rule], he would veto the bill.”

Update: On June 8, President Obama vetoed the Congressional resolution to block the fiduciary rule from taking effect. On June 23, a House vote to override the president's veto failed along party lines by a 239-180 vote.​

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

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