With the final fiduciary rule implementation set to take effect today — at 11:59 pm local time — it’s vital that employers and their retirement advisers are in the know about the new regulation.
The rule alters some aspects of how employers oversee their retirement plans. It also changes the definition of who is a fiduciary when it comes to advising employers on their 401(k)s, pensions and other retirement plans. Granted, many of the new regulations have been public for months, but there are some exceptions to the guidelines which even well-versed HR and benefit executives might not be familiar.
Here are answers to some key questions employers may have:
How will the rule affect employers’ role as fiduciary?
Employers who sponsor retirement plans are already fiduciaries, so it will continue to be their job to make sure their retirement-plan service providers are working in the best interest of their employees, says Shelby George, senior vice president, advisor services, for Manning & Napier, an investment management company. Fiduciaries must “act in the best interest of plan participants, make decisions with a prudent process and ensure that participants pay no more than reasonable fees,” George explains.
But, under the rule, plan sponsors will need to determine whether the person advising their retirement plan is also acting as a fiduciary. That means digging deeper into how their adviser operates and looking into the fees they are charging to the plan and being passed on to plan participants.
Overall, industry experts say that all of the attention on the fiduciary rule in recent months has opened the eyes of most plan sponsors, causing them to do a much better job of checking out the advisers who work with their retirement plans. And because the fiduciary rule has been in the works for years, most companies who deal with financial advice — whether registered investment advisers or broker-dealers — have already made the necessary changes to their business practices and have already moved forward with the changes.
How does the final rule affect retirement education and communication?
The final rule draws a line between education and advice when it comes to plan information, general financial and investment information, asset allocation models and interactive investment materials. Providing plan participants with general information in all these areas is not considered investment advice. It only becomes advice if the plan recommends specific investments as part of its educational efforts.
Most retirement plan providers have already invested a great deal of money into improving plan communication and education, making every effort to comply with the fiduciary rule’s mandate.
What exemptions should employers pay attention to?
There are a couple of important exemptions attached to the final fiduciary rule that employers should be aware of: the best interest contract exemption and the seller’s exception.
The best interest contract exemption, or the BICE, allows employers to continue working with a retirement plan broker, who collects commissions from firms that offer retirement products, as long as the broker meets certain conditions, such as agreeing to act in a fiduciary capacity and disclosing the different types of compensation and fees it collects. Brokers must also state that they won't make any misleading claims about the investments they recommend.
There's also the seller’s exception, which states that sales recommendations made by a broker to a retirement plan with at least $50 million in assets will not be considered investment advice and thus subject to the fiduciary rule as long as it is clear from the beginning of the transaction that the person selling the investments does not consider themselves to be a giver of impartial investment advice.
Large plan sponsors will need to make sure they inform participants of these types of arrangements.
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