After years of deliberation and industry commentary, the Department of Labor released its final rule regarding who is and isn’t a fiduciary when it comes to retirement advice.
Most people believe the rules won’t have much of an impact on retirement plan sponsors, but as fiduciaries themselves, they do need to know what is happening and how it will affect the way they approach their 401(k) plans.
“Plan sponsors should be paying attention to it, but I highly doubt many are paying attention to it now,” says Skip Schweiss, president of TD Ameritrade Trust Company and managing director for Advisor Advocacy and Industry Affairs for TD Ameritrade Institutional. Larger plans, with retirement plan committees, are probably keeping an eye on the rules, but he reckons many small plans are not. They will begin paying attention when their plan advisers come to them saying that changes are coming, he adds.
Many plan sponsors were concerned that their attempts at educating employees about their retirement plans would be viewed as advice and thus be covered under the fiduciary rule.
The final rule makes it clear that advisers and plan sponsors are still able to provide general education about retirement savings without triggering fiduciary duties.
Joe Reese, institutional retirement consultant at Unified Trust Company in Rochester, N.Y., works with both fiduciary and non-fiduciary plan advisers. He is concerned that the final rule exempts general communications that a “reasonable person” would not view as an investment recommendation, such as general circulation newsletters, commentary in publicly broadcast talk shows, research or news reports.
"The DOL also expanded the ability of plans with less than 100 participants to obtain investment advice from an advice provider without that advice provider becoming subject to the fiduciary rules," notes Erin Sweeney, counsel at Miller & Chevalier.
Still, the wording leaves a lot of gray areas, says Reese.
“The original proposal kept the gray areas out, taking the five-pronged investment advice language and making it more black and white. That’s why I think they watered it down a little bit,” he says.
He agrees with Schweiss that plan sponsors don’t really understand what the fiduciary rules are.
“They have the assumption that the person they are working with is putting their interests first, even though it is maybe not the legal requirement. But just because there is so much information out there now, it has been publicized so much, it is going to seep into the mind of plan sponsors,” Reese says.
Schweiss says that while he doesn’t anticipate plan sponsors having to do much to comply with the new rules, he believes many companies will take this opportunity to switch from a broker to a registered investment adviser when it comes to advising them on their retirement plans.
Many insurance companies and broker-dealers have warned that the rules will be so onerous they will just stop serving the small-plan market.
Schweiss says he gives this threat “limited credence” but “if we take them on their word, we could see a lot of movement.”
He points out that together the IRA market and the defined contribution plan market are a $12-trillion industry.
“There’s no way these financial advice providers, broker-dealers and insurance companies are going to turn their back on a $12-trillion market. It is too huge a slice of the overall asset base in America today to walk away from it because it is going to be harder now,” he believes.
Even though TD Ameritrade has operations on both sides of the fence, he says he is “taking the other side from the ‘sky is falling’ crowd. Companies are resilient. Companies who have been around for a long time, they are resilient and they’ve adapted to changes in the marketplace and laws and regulations. I believe they will do the same thing here.”
Reese says that most advisers who already work with many 401(k) plans will continue to do so. Broker-dealers that only work with one or two plans currently may decide that it is too much of a hassle to stay in the business.
The rule does create a higher standard overall and provides more opportunities for litigation, he says. Smaller broker-dealers will struggle with it more than larger ones that have the resources to adapt to the new rules.
“If you are only tangentially involved in this business, more regulations make it more difficult to stay in it. If they are committed to it, those people will find a way to stay in it,” Reese adds.
TD Ameritrade has spent a lot of time since fee disclosure rules went into effect in 2012 trying to get RIAs more involved in advising retirement plans.
“They will be very well-positioned as the regulations evolve,” says Schweiss.
President Obama voiced his support of the DOL’s efforts on Feb. 23, 2015, when he called on the Department of Labor “to update the rules and requirements that retirement advisers put the best interests of their clients above their own financial interests. It’s a very simple principle: You want to give financial advice, you’ve got to put your client’s interests first.”
In 2013, the Government Accountability Office conducted a study of call centers at large 401(k) providers. Claiming to be employees who were leaving their company, GAO staff asked call center employees what their options were for their retirement accounts. The call center employees consistently told callers they should roll over their balance to an IRA without asking them any questions about their personal situation.
“Those employees should be given all their options and let them consider the choices. Every person and individual is different. They should not default everyone into an IRA with the firm that is running the 401(k). It may be a good option in some cases, but not a good option in some cases,” Schweiss says.
Changes to the rules may mean that call center employees need to follow a different script; one that presents all the options available to a plan participant. When they inevitably ask what they should do, the call center employees can either tell them they can’t give them advice or they can refer them to a fiduciary adviser on staff.
Just giving a person their options does not constitute advice; it’s considered education. As long as the person on the phone isn’t recommending one option over another, they won’t come into conflict with the new rules.
“I think the physical structure of the call centers is not going to change,” says Doug Fischer, senior vice president of policy development for Fidelity. “We need highly skilled people to take these calls because the calls are not going to stop.”
Fidelity has a working team considering how the rules will change how its call centers conduct business.
“I don’t see major changes in the composition and ability to answer these calls. I think we’ll, in essence, figure this out. We have to have a good customer experience, but the compliance underneath it will be a lot of work,” he says.
Fischer believes that people operating under the broker-dealer model are considering all of their options, including what effect it would have on them to move to a flat-fee advice model.
“I think there will be some consolidation of the industry into [something] like centers of excellence. The advisers will look to the providers in the industry, whether Fidelity or others, that are going to … help them with practice management and any transition they do from broker-dealer to flat fee, help them with compliance, reporting, sponsor engagement and plan participants,” he says.
The broker-dealer model won’t go away. If anything, the two models will coexist, he believes. Some plan sponsors will want to continue to use that model and “I think there will be some advisers who want to use that model. What is important and helpful is everybody is given the opportunity to better disclose to participants what their fees are and hopefully it will be simple enough to get participants to read it and understand it,” Fischer says.
In the case of a worker rolling over a 401(k) account to an IRA, the adviser or broker-dealer who works with the plan must give an account holder every option instead of just recommending they roll everything over to an IRA. That includes leaving their money with their former employer’s plan, moving it to a current employer, taking a lump sum disbursement or transferring the money to an IRA.
The fiduciary rule, which was initially proposed in 2010, has been a long time coming, and opponents say it has the potential to change the way many advisers and broker-dealers do business, and not necessarily for the better.
For the first time, individuals who sell individual retirement accounts will have to follow the same fiduciary standard as registered investment advisers, meaning that if they give investment advice or recommend certain types of financial instruments, like annuities, they must only make recommendations that are in the best interest of the participant they are working with.
Register or login for access to this item and much more
All Employee Benefit News content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access