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Consider negotiating advisors’ continued adherence to the best-interest standard
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The Department of Labor's (DOL's) fiduciary advice rule changed the way retirement plan sponsors contract with financial services firms to provide advice to plan participants. Now it's been
rendered unenforceable following a recent 5th Circuit Court of Appeals decision that the DOL chose not to appeal. Ultimately, a different advice rule
proposed by the Securities and Exchange Commission (SEC) may cover some of the same ground, but that could be years away. For now, what should plan sponsors take away from the demise of the DOL's rule?
"Service provider agreements, including terms related to fees, may need to be updated," said Brian Tiemann, a partner in the Chicago office of the law firm McDermott Will & Emery.
Under the Employee Retirement Income Security Act, the fiduciary rule expanded the definition of "fiduciary" to those who provide investment advice to retirement plan sponsors and participants.
Under the fiduciary standard, advisors provide only advice that is in participants' best interest, regardless of fees or commissions, and they disclose conflicts of interest. Prior to the fiduciary rule, advisors only had to provide advice deemed "suitable" in terms of someone's financial needs, even if competitive products were available at a lower fee.
Return of the Suitability Standard
"As a result of the Fifth Circuit's ruling, the suitability standard is effectively restored" for advising plan participants on investments, distributions and rollovers, Tiemann observed. Consequently, advisors may want to revise service agreements with plan fiduciaries to clarify the scope of advice that fiduciaries will provide participants.
"Some advisors likely will
not want to take on any additional fiduciary obligations beyond what is actually required by law, therefore preferring to provide advice under the suitability standards, as opposed to continuing to seek to comply with the impartial-conduct [fiduciary] standards," Tiemann said.
Some advisors have invested significant time and resources into developing processes and systems that satisfy the higher fiduciary standards. "These advisors may prefer to keep these processes and systems in place, but may still revisit whether to take on any additional fiduciary liability beyond what is required by law," Tiemann said.
"Plan sponsors should be attuned to recordkeeper and other vendor requests to revist processes and contracts that had been revised to comply with the now-defunct fiduciary definition," advised Conduent HR Services consultants Marjorie Martin and Julia Zuckerman in an online post.
[SHRM members-only toolkit:
Designing and Administering Defined Contribution Retirement Plans]
DOL Issues Temporary Relief
In the wake of the 5th Circuit ruling, on May 7 the DOL issued
Field Assistance Bulletin 2018-02, announcing a nonenforcement policy for certain transactions prohibited under the fiduciary rule and allowing service providers to continue to offer "fiduciary" advice programs—provided they make good-faith efforts to comply with the impartial-conduct standards.
The 5th Circuit ruling "vacated the exemptions that were associated with the fiduciary regulation"—exemptions that had given providers liability protection in situations that might otherwise have been gray areas—explained Fred Reish, managing director of the Los Angeles law firm Reish, Luftman, Reicher & Cohen. Due to the loss of exemptions, including
the best-interest contract exemption that allowed so-called conflicted compensation to be paid if appropriate disclosures were provided to participants, "many advisors … have inadvertently engaged in prohibited transactions during the time since the fiduciary rule first applied on June 9, 2017. As a result, relief was needed," Reish noted.
He noted that the
SEC's proposed Regulation Best Interest, should it eventually be finalized and take effect, would be similar to the DOL's vacated best-interest contract exemption.
In Field Assistance Bulletin 2018-02, the DOL said that it "will not pursue prohibited transactions claims against investment advice fiduciaries who are working diligently and in good faith to comply with the impartial-conduct standards for transactions that would have been exempted" under the rule.
"The DOL is providing relief to advisors that are 'working diligently and in good faith' to comply with the impartial-conduct standards, even though the expansion of the fiduciary rule and the related exemptions are no longer binding on the advisors," Tiemann observed.
"The current DOL response is temporary; refinements and additional guidance are expected," Martin and Zuckerman noted.
The temporary exemption "will, for the time being, allow business to go forward while the SEC and the DOL work on their new rules," Reish said.
In the meantime, retirement plan sponsors should discuss with advisors whether they will continue abiding by the fiduciary standard with regard to compensation terms, disclosing conflicts of interests and providing best-interest advice to plan participants.
Related SHRM Articles
SEC's Investment Advice Proposal Upends Fiduciary Debate,
SHRM Online Benefits, April 2018
5th Circuit Ruling Leaves DOL's Fiduciary Rule in Limbo,
SHRM Online Benefits, March 2018
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