The Fifth Circuit Court of Appeals decision Thursday to vacate the Department of Labor’s fiduciary rule is just another piece of uncertainty for plan sponsors and others in the industry who have attempted to comply with the rule, which went into effect June 9, 2017. But, regardless of the final outcome of the regulation, industry experts say that best-interest standards for retirement accounts will — and should — live on.
Despite the Fifth Circuit ruling that the DOL overstepped its authority under ERISA in implementing the rule, essentially declaring the rule void, many industry experts say it should be business as usual for plan sponsors. Not only could the appeal have a minimal effect on plan sponsors, they say, but even if the rule is overturned eventually, it’s still good to ensure that their retirement-plan service providers are working in the best interest of their employees.
“It is good risk management to keep complying,” says fiduciary lawyer Fred Reish, a partner in the Los Angeles office of Drinker Biddle & Reath LLP.
The ruling could affect relationships among plan sponsors and various service providers, such as their plan adviser, record keeper or third party administrators, as some of those providers will no longer be considered fiduciaries under the decision, Reish says. He points out that the fiduciary case still wending its way through the U.S. Court of Appeals for the D.C. District also could have an impact on the discussion. Since two appeals courts have weighed in on the rule in the last month — with different outcomes — it may end up in front of the Supreme Court, Reish adds.
On March 13, the 10th Circuit Court of Appeals ruled in favor of the fiduciary rule in a Kansas case that questioned why fixed income annuities were split off from other types of annuities in their treatment under the regulation.
Plan sponsors should “assume the [fiduciary rule] does apply until you are definitively told otherwise,” Reish advises. “If you’ve been looking at everything through the lens of the new rule since June 9, then just keep doing that. The risk management answer is that nobody knows what to tell you right now. The only safe answer is to conduct yourself to the highest standard because it could be there or it could go away.”
Similarly, Nevin Adams, chief content officer for the American Retirement Association, says that regardless of what transpires from the appeal, many plan sponsors have already committed to the fiduciary rule and “probably have already taken steps to be in full compliance. I suspect that most advisers who work with ERISA retirement plans are probably already on track for complying with the rule and will continue doing what they’re doing.”
Reish adds that because only three of the Fifth Circuit Court judges were involved in the opinion to vacate the fiduciary rule, the case may be reviewed en banc, which means that all of the judges in the Fifth Circuit would review the decision. Since the one dissenting vote in the appeals court’s 2-1 decision was the chief justice of the Fifth Circuit, Reish believes this is a good possibility. The other possibility is that the Department of Labor will file a petition for a writ of certiorari, which asks the Supreme Court to review the decision. Either way, the fiduciary rule is up in the air and could remain that way for as long as 18 months, Reish said.
So what happens next?
If nobody appeals the court’s decision, then the law regarding who is a fiduciary will be eradicated and the industry would go back to where it was before the fiduciary rule took effect in June. This could happen as early as May, says Reish.
Under the old rules, plan sponsors are still considered fiduciaries. The fiduciary rule only applies to non-discretionary investment advice. “The way employers control plans, they always will be and always have been fiduciaries,” Reish says. “This rule doesn’t apply to people who have discretion or who have actual control.”
Because the fiduciary rule has been in the news so much, retirement plan participants are more likely to ask questions about it. Because of that, “plan sponsors are taking their responsibility to the next level and doing the right things for plan participants. Whether that is in relation specifically to the fiduciary rule or not, we believe the activity they are doing really is in the best interest of their participants,” said Stacy Sandler, principal for Deloitte Consulting.
Plan sponsors have taken a more active role when it comes to how much their retirement plans are charging in fees. They also are ensuring their service agreements are for shorter time periods, which forces them to more frequently reevaluate their service providers and the fees they are being charged, she added. They also are doing a better job of vetting their retirement plan advisers and making sure that they are acting in the best interest of their employees.
John Berlau, a financial policy expert for the Competitive Enterprise Institute, said that the ruling by the Fifth Circuit Court of Appeals to vacate the fiduciary rule “is a victory for the rule of law and for millions of middle-class American savers and investors. The court rightly labeled as arbitrary and capricious the Labor Department’s issuing of this regulation that goes against Congressional intent and redefines fiduciary in a way that gives the department broad power over a broad swath of investment professionals servicing 401(k)s and individual retirement accounts.”
He adds that the rule was “based on the false premise that most holders of 401(k)s and IRAs lacked the ability, in the Obama Labor Department’s words in the proposed regulation, to ‘prudently manage retirement assets on their own’ and ‘distinguish … good investment results from bad.’”
Berlau says that many companies have already pulled out of this market or reduced their services to middle-class investors as a result of the fiduciary rule. He believes that any fiduciary standard should be issued by the Securities and Exchange Commission and not the Department of Labor.
“The vast majority disliked this rule when it came out because they felt like it added a lot of burdens to their operations and would hold them to a much higher legal standard,” says Bart McCollum, president and chief operating officer for Ameriflex, a health savings account administrator. “A lot of ambiguities in the rule made it so certain types of people would be subject to the fiduciary rule.”
McCollum says the rule is ambiguous as it relates to the cash/transnational side of HSA accounts, so there was a question as to whether the rule would apply for these types of administrators like Ameriflex.
Jon Stein, founder and CEO of Betterment and a vocal supporter of the fiduciary rule, said in a statement that “throughout the fight for the fiduciary rule, we’ve seen positive evolution to financial services -- including easier access to low-cost investments and heightened awareness of how financial providers are compensated. The decision to void the fiduciary rule is not only a step backwards for the industry, but an attack against the biggest benefit for America’s 75 million hard-working retirement savers. Once again, Wall Street firms have won at the expense of the individual investor.”
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