Retirement plan industry experts are greeting the Department of Labor’s final fiduciary rule with a mix of caution and optimism, with some calling it a “big win” for 401(k) plan sponsors and participants and others saying it has the potential to confuse employers and disrupt their ability to engage employees in retirement planning.

While the rule is “extremely good” for retirement plan participants and those who have IRAs, it may have the unwanted effect of confusing plan sponsors, says Matt DiGennaro, founder and CEO of Seabridge Wealth Management, adding it’s now incumbent upon plan sponsors to consult with an ERISA attorney to ensure their 401(k) plan advisers are adhering to the rule.

“It’s going to be incumbent on plan sponsors to reach out to an ERISA attorney – not their brokers, not their advisers, but someone who is independent and objective – and understand if their current broker or adviser is adhering to the new standards,” he says, adding that he’d advise employers to contact an ERISA attorney within the next 30 days.

[Image: Bloomberg]
[Image: Bloomberg]

“It’s one thing to understand what the rule is, but the most important part is to ensure your broker is adhering to the new fiduciary-standard rule,” says DiGennaro.

The fiduciary regulation, published in its final form today, dropped the contract requirement for ERISA plans and their participants and beneficiaries. Firms must still acknowledge – in writing – that they, and their advisers, are acting as fiduciaries when providing investment advice to a plan or beneficiary, but no contract will be required.

“They did that to smooth the administrative process for brokerage firms,” says Robert C. Lawton, president of Lawton Retirement Plan Consultants, who calls the final rule a “win” for plan sponsors. “That doesn't mean that brokerage firms won't have to act as fiduciaries to ERISA plans – they will – and will have to acknowledge that in writing. It means they won't have to acknowledge that responsibility in a separate client contract.”

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“It’s one thing to understand what the rule is, but the most important part is to ensure your broker is adhering to it."

The American Retirement Association, a professional association of actuaries, pension plan professionals and retirement plan advisers, also calls the changes the DOL has made to the final rule “a big win” for 401(k) plan participants and sponsors. In particular, the group is pleased with the rule’s special exemption for advisers and firms that receive only a “level fee” for the advice they provide in conjunction with the decision to roll over assets from an employer-sponsored plan such as a 401(k), so long as certain conditions are met, including an acknowledgement that the recommendation is in the customer’s best interest.

DiGennaro expects the rule to accelerate employers’ adoption of RIAs as retirement plan advisers. “Being an RIA – whether you’re registered with the SEC or by the individual states – you’re already a fiduciary who must, by law, fully disclose all fees upfront and in writing and eliminate conflicts of interest,” he says. “The RIA industry is already set up for this so it should be a benefit to independent fiduciaries who are RIAs.”

The American Benefits Council, meanwhile, is concerned about what it says is “the potential chilling effect of the new standards on employee engagement if employers are not able to continue working effectively with employees to strengthen their use of retirement programs and improve their overall financial well-being,” said Council president James A. Klein. “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.”

Department of Labor Secretary Thomas Perez announced yesterday that for the first time, anyone providing investment advice for retirement plans will be designated a fiduciary, requiring advisers, planners and wealth managers to place their clients’ financial interests above their own.

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“The RIA industry is already set up for this so it should be a benefit to independent fiduciaries who are RIAs.”

“With the finalization of this rule we are putting in place a fundamental consumer protection into the American retirement landscape,” Perez said. “It’s in Americans’ best interest. It is a huge win for the middle class.”

Under the current system, advisers to IRAs and broker-dealers have to follow a suitability standard of conduct, meaning they can find products for clients to invest in that are deemed “suitable,” even if they come with higher fees.

“Before this rule, firms were allowed to offer incentives to retirement advisers to steer investors into accounts with higher fees and lower returns,” said Jeff Zients, director of the White House National Economic Council.

The Department of Labor has come under fire from many in the industry, particularly industry trade groups, insurance companies and large wealth management firms, saying that the rules, as originally proposed, would force brokers and IRA advisers to stop serving clients with small account balances, limiting their access to good financial advice. Many have moved to block the proposal since its first incarnation in 2010. Numerous bills have been proposed in Congress that would take the teeth out of this rule if they managed to escape President Barack Obama’s veto, which is unlikely to happen since he voiced his support for a fiduciary rule early in 2015.
Perez calls these groups a “small and boisterous minority.”

He scoffed at the notion that larger firms would stop serving small or moderate savers, saying there are plenty of advisers out there who have contacted the Department of Labor saying they would love to pick up that business.

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“We have streamlined, simplified and clarified our rule while remaining true to our North Star."

The DOL did take much of what it heard during hearings about the fiduciary rule to heart.

“We have streamlined, simplified and clarified our rule while remaining true to our North Star,” said Perez. That would not have been possible without the constructive engagement of consumer and industry groups and other stakeholders, he added.

One section of the proposed rule that had the financial industry riled up was the mechanics of the best interest contract exemption. The proposal would have required that investors sign an extensive contract with the adviser and the firm the adviser works for the first time they met. In that contract, they would have had to disclose compensation and fee information, inform clients that the adviser and firm must act in a fiduciary capacity and include a list of steps the adviser would take to mitigate potential conflicts of interest.

In the final rule, advisers and their companies don’t have to enter into such a contract with investors until they open an account with them.
The other fear was that the fiduciary rule would prohibit insurance companies from taking advantage of the best interest contract exemption if they sell proprietary products such as fixed income or variable annuities. Under the new rule, advisers recommending any asset can take advantage of the exemption to continue receiving the most common forms of compensation.

The DOL believes that these types of products make up an important part of the retirement marketplace. “Many people are looking for a steady stream of income,” said Perez. The fiduciary rule is not asking one insurance company to advise clients about the proprietary products offered by another insurance company, but they do have to have policies and procedures in place to make sure people understand that when they enter into a conversation with that company, there is a limited book of business that company sells, he added. Even in that situation, the advisers are obligated to only make recommendations that are in a client’s best interest.

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“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.”

“The standard is the same regardless of context. Make sure you are providing information in the client’s best interest. That doesn’t mean you have to recommend the lowest priced car,” said Perez.

“For different people, depending on their risk profile, depending on their age and the asset allocation they may choose, the issue of what is in their best interest will be different. For some people, it may be that an annuity product is the right product. For others, a simple index fund is the best product,” Perez said.
The BIC exemption will also be available for advice to small businesses that sponsor 401(k) plans, as well as for advice to IRA customers and plan participants. Also under the final rule, recommendations to plan sponsors who manage more than $50 million in assets will not be considered investment advice if certain conditions are met so they would not require an exemption.

The rule also streamlines and simplifies the required disclosures. The transaction disclosure is simplified to focus on the firm’s conflicts of interest; the website disclosure is streamlined but still designed to enable third parties to help customers evaluate different firms’ practices that may affect advisers’ conflicts of interest; and the annual disclosure is eliminated entirely.

Perez also announced the rule will go into effect on Jan. 1, 2018, giving broker-dealers and wealth management firms more time to comply.

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