DoL’s Final Fiduciary Rule Released

April 13, 2016

pic-lending-investmentOn April 6, the Department of Labor (DOL) issued a final rule defining who is a fiduciary investment advisor of an employee benefit plan under the Employee Retirement Income Security Act of 1974. The final rule requires financial advisors and brokers handling 401(k) accounts, as well as Individual Retirement Accounts and Annuities (IRAs), to put their clients’ best interest before their own profits. As a fiduciary, they will be held to a higher standard than what most retirement advisers adhere to today—a lesser “suitability” standard that lets them recommend products that are suitable but not necessarily in their clients’ best interest.

Following its initial proposal in April 2015, the DOL conducted a comment period lasting over five months and received extensive feedback through four days of public hearings, receiving thousands of comment letters, and conducting more than 100 meetings. After considering all this input, upon release of the final rule, the DOL stated that they intended to alleviate some of the industry’s concerns, while at the same time protecting the best interests of retirement savers.

The DOL’s conflict of interest final rule and related exemptions is intended to protect investors by requiring all who provide retirement investment advice to retirement plans and IRAs to abide by a “fiduciary” standard – putting their clients’ best interest before their own profit.

The initial proposal included a very short eight-month implementation period. The final rule will begin to take effect in part by April 2017, with full implementation due in January 2018.

Some of the most important changes from the proposed rule to the final rule and exemptions include:

  • Clarifying the standard for determining whether a person has made a “recommendation” covered by the final rule;
  • Clarifying that marketing activities without making an investment recommendation does not constitute fiduciary investment advice;
  • Removing appraisals from the rule and reserving them for a separate rulemaking project;
  • Subject to certain conditions, allowing asset allocation models and interactive materials to identify specific investment products or alternatives for ERISA and other plans (but not IRAs) without being considered fiduciary investment advice;
  • Providing an expanded seller’s exception for recommendations to independent fiduciaries of plans and IRAs with financial expertise and plan fiduciaries with at least $50 million in assets under management.

The new Best Interest Contract Exemption (the BICE) includes:

  • Eliminating the limited asset list from the BICE;
  • Expanding the coverage of the BICE to include advice provided to sponsors of small 401(k) plans;
  • Eliminating the contract requirement for ERISA plans and participants;
  • Not requiring contract execution prior to advisers’ recommendations;
  • Specifically allowing for the required contract terms to be incorporated in account-opening documents;
  • Providing a negative consent process for existing clients to avoid having to get new signatures from those clients;
  • Simplifying execution of the contract by requiring the financial institution to execute the contract rather than each individual adviser;
  • Clarifying how a financial institution that limits its offerings to proprietary products can satisfy the best interest standard;
  • Streamlining compliance for fiduciaries so that a rollover from a plan to an IRA or moving from a commission-based account or moving from one IRA to another will receive only level fees;
  • Eliminating most of the proposed data collection requirements and some of the more detailed proposed disclosure requirements;
  • Requiring the most detailed disclosures envisioned by the BICE to be made available only upon request;
  • Providing a mechanism to correct good faith violations of the disclosure conditions without losing the benefit of the exemption.

While the final rule made some concessions to the concerns of the small-business community and financial sector, the underlying regulation will reshape industry business models, drive litigation and potentially lock out small businesses and lower-income people from getting financial counseling and solutions to meet their retirement planning needs. Congress is currently reviewing legislative options.

This rule would significantly increase liability risk and regulatory costs for brokers. NSBA has said that it would make giving and receiving advice much more expensive, potentially ending access to advice for people with modest accounts. The costs to firms and advisors of implementing such a complex rule will result in higher costs and reduced access to advice, service and products for retirement savers. This will likely result in fewer plans, fewer participants and lower overall retirement savings.