Trump’s Directive Could Begin to Undo the DOL's Fiduciary Rule

Department of Labor directed to review fiduciary rule’s impact

By Stephen Miller, CEBS Feb 6, 2017
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updated Feb. 9, 2017

Update: DOL Moves to Delay Fiduciary Rule by 180 Days

The Department of Labor is preparing to delay the Obama-era fiduciary rule on financial advice for six months. On Feb. 9, the DOL sent two documents to the Office of Management and Budget for approval. One document is a proposed rule that delays the regulation's effective date—now April 10—for 180 days. That proposal has a comment period of just 15 days. The potential delay is merely pending and cannot be made official until the comment period ends.

The second document would start another round of public comment on the rule itself, which requires financial advisers to put their clients' best interests first when advising them about 401(k) and similar defined contribution retirement plans. After the end of this comment period, the DOL could propose revising or rescinding the fiduciary rule.


President Donald Trump on Feb. 3 ordered a broad review of the Department of Labor's (DOL's) fiduciary rule that applies to retirement plan advice. The intent is to lessen the regulatory burdens that the Obama administration place on financial services firms, but employers that sponsor 401(k) or similar retirement plans will also be affected.

Fiduciary Rule Rollback

The final version of the Executive Memorandum signed by the president directs the DOL to review the fiduciary rule. The DOL is tasked with preparing an updated economic and legal analysis concerning the likely impact of the fiduciary rule, including:

  • Whether the rule is likely to harm investors due to a reduction of Americans' access to certain retirement savings offerings, information and advice.

  • Whether anticipation of the rule taking effect has resulted in dislocations or disruptions within the retirement services industry that may adversely affect investors or retirees.

  • Whether the rule is likely to cause an increase in litigation, and an increase in the prices that investors and retirees must pay to gain access to retirement services.

If, according to the memo, the DOL discovers these things are happening, or that the fiduciary rule is not allowing Americans to make their own financial decisions or helping them save for retirement, then the DOL is directed to publish for notice and comment a new proposed rule rescinding or revising the fiduciary rule.

"The Executive Memorandum does not, in and of itself, repeal, revise or delay the fiduciary rule," said Marcia Wagner, principal of the Wagner Law Group in Boston. "The DOL will have to determine whether and how a delay may or should be implemented." A formal delay and a stay in the litigation could then come in a separate action by the agency.

Indeed, following release of the memorandum, Acting U.S. Secretary of Labor Ed Hugler issued a statement that said, "The Department of Labor will now consider its legal options to delay the applicability of the date as we comply with the President's memorandum."

"We are returning to the American people, low- and middle- income investors, and retirees, their control of their own retirement savings," the president said as he issued the directive.

A Third Court Upholds Fiduciary Rule's Legality

A federal district court in Dallas on Feb. 8 denied a request to vacate the Department of Labor's controversial fiduciary rule, promulgated by the Obama administration. The rule had been challenged by the U.S. Chamber of Commerce, the Securities Industry Financial Markets Association and a consortium of trade groups.

This was the third district court to decide in favor of the fiduciary rule's legality in lawsuits brought by industry groups, following rulings last year in Kansas and in the District of Columbia, which suggests that higher courts also may be unlikely to overturn the regulation—a development that would have kept the rule in place if the Trump administration were favorably disposed toward it.

While these rulings hold the fiduciary rule, which is set to take effect on April 10, to be legal, they do not prevent President Donald Trump's administration from deciding to take steps to delay, revise or revoke the rule, through new rulemaking, as a matter of policy. But some legal observers think the court's decision could make repeal more difficult. (See SHRM Online's In Focus: Federal Court in Dallas Rules in Favor of Fiduciary Rule, But Does It Matter?)

"It remains to be seen whether plaintiffs in the Texas case, or the other two cases [Kansas and the District of Columbia], will pursue an appeal, particularly since the Trump administration has sent a clear signal that it has designs on at least making some adjustments to the rule as it stands," said Nevin Adams, chief of communications for the American Retirement Association in Arlington, Va.

Controversial from the Start

Last April, the DOL published its long-awaited—and highly controversial—final rule to address conflicts of interest in retirement advice by applying the fiduciary standard to those who provide investment advice to sponsors and participants in 401(k)-type plans defined contribution and individual retirement accounts.

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The fiduciary rule requires retirement plan advisors to recommend investments that are in the "best interest" of retirement plan participants (i.e., without regard to commissions and fees) by following the fiduciary standard under the Employee Retirement Income Security Act (ERISA). The current standard for retirement plan advisors requires that recommended mutual funds or other investments be "suitable" for an investor but not necessarily the lowest cost option among identical or similar funds.

Under the fiduciary rule, advisors also must disclose any potential conflicts of interest, such as revenue-sharing payments that they receive from the mutual funds they sell.

While aimed at financial advisors who provide retirement plan services, the rule affects compliance obligations and costs for plan sponsors as well. For instance, sponsors of 401(k) plans would become responsible for ensuring that any advice they received, or allowed participants to receive, was provided by investment advisors who were adhering to ERISA's fiduciary standard—putting plan sponsors at a higher risk of facing participant lawsuits and ERISA-violation penalties if they fail to do so. Plan sponsors were advised to review and, as needed, revise their contractual agreements with investment advisors.

Imposing the fiduciary standard would reduce the willingness of firms that serve as plan administrators to provide advice bundled with other plan services and with no direct cost to plan participants, those opposing the change warned. Others viewed the expansion of fiduciary requirements as a needed safeguard against conflicted advice.

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.

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

What's Ahead

If the new secretary of the DOL—still to be confirmed—"seeks to amend and/or repeal the rule, doing so will take additional rulemaking, comment periods, etc.," because a final regulation was already enacted, said Brendan McGarry, an attorney at Kaufman Dolowich and Voluck in Chicago.

"The [financial services] industry has already started to implement some of the sweeping changes required for compliance with the rule, such as changing compensation structures and devising new products—such as lower-cost shares of mutual funds—in an effort to comply. It is unlikely that all of this work will simply be undone or forgotten. The move to more transparent compensation and oversight of same is likely going to proceed," McGarry noted.

Even if the fiduciary rule is eventually weakened or repealed, changes already made by financial services firms and plan sponsors, 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.

"The movement toward requiring retirement plan advisors to function as fiduciaries is well underway—rule or not," she explained. "Many of the country's top advisors to retirement plans have already been serving plan committees in a fiduciary capacity. We also see fees for these services being expressed as a hard dollar amount, not a percentage of assets."

Brambley added, "as the law stands now, when lawsuits for excessive fees are brought—and we all know these suits happen—they are brought against the plan committee whose members are held as fiduciaries, not against the broker or other advisor who isn't a fiduciary. It's clear to us that the movement toward plan advisors as fiduciaries has built significant momentum and it will continue, with or without a rule."

A Positive Impact

"The publicity around the rule of the past year has had positive impact," agreed Seth Rosenbloom, associate general counsel at Betterment for Business, a New York-based 401(k) advisory firm. Retirement plan investors are "paying attention to fees and conflicts, asking important questions, and holding financial providers to higher standards. That should continue even if the administration halts the rule."

Plan sponsors will remain fiduciaries, "and still need to carefully consider how they're paying for investment advice" provided to the plan's investment committee and to plan participants, said attorney Erin Sweeney, member at Miller & Chevalier in Washington, D.C.

While some firms have moved to flat fees and fiduciary status for plan advisors, "if the fiduciary rule is rescinded or modified, we may see financial firms offer both [fiduciary and nonfiduciary] advice models," she said, "providing a menu of alternative structures for their clients to choose from."

Kevin Selzer, an associate with law firm Holland & Hart in Denver, recommends that employers and their benefits committees should:

  • Evaluate whether they will require advisors to comply with the requirements of the rule despite the memorandum.

  • Reach out to their advisors/consultants and confirm whether they intend to proceed with implementing changes to comply with the rule.

  • Continue to monitor developments in this area from a fiduciary risk perspective.

Related SHRM Online Article:

Trump Orders Dodd-Frank Review, SHRM Online Compensation, February 2017

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