Defined Contribution / Financial Law and Regulation

The Latest on the DOL Fiduciary Rule: Get Ready, Set…

By Karen W. Scheffler June 07, 2017
The Latest on the DOL Fiduciary Rule: Get Ready, Set…

The new fiduciary rule from the US Department of Labor (DOL) is set to go into effect on June 9, 2017. What will it mean for defined contribution (DC) plan sponsors?

The Fiduciary Standard: What’s New?

For one thing, the new rule expands the reach of who is considered a fiduciary when providing investment advice for a fee. Newly included fiduciaries under that definition will be subject to a higher standard of care.

Of course, under the Employee Retirement Income Security Act of 1974 (ERISA), plan sponsors have always been held to the fiduciary standard that requires them to act in participants’ and beneficiaries’ best interests. The big change now is that some service providers who weren’t fiduciaries before may become fiduciaries under the new rule—even though they haven’t changed what they do.

These service providers—including recordkeepers, consultants, brokers and investment advisors—will now be required to act in the client’s best interest when providing investment advice for a fee. Here are some of the issues plan sponsors need to think about:

The definition of advice. The new fiduciary rule defines fiduciary advice more broadly, to include any “investment advice” or “recommendation” given to an employee benefit plan or an IRA. Some communications will also be considered fiduciary advice.

What does this mean for plan sponsors? They’ll need to understand what constitutes “investment advice” and what service providers are doing that may fall under that definition. For example, the change will likely require plan sponsors to take a fresh look at all communications from recordkeepers, call centers, rollover providers and investment advisors.

Co-fiduciary liability. Retirement plan fiduciaries have always been accountable for prudently selecting and monitoring service providers and keeping their fees in check. But the new fiduciary rule specifies situations that could now create co-fiduciary scenarios. Some service providers who weren’t previously fiduciaries may now become fiduciaries, so plan sponsors must understand each party’s fiduciary status and specific responsibilities. It’s the only way to clarify when and how someone could be liable for another party’s breach of fiduciary duty.

Fee changes. Under the new fiduciary rule, fees for investment advice must be reasonable and not “conflicted.” That means the investment advisor is obligated to recommend investments based on the client’s best interest, rather than investments that will pay the advisor the most. The fee structures related to asset management, commissions and certain services may change. And unless an exemption is available, a fiduciary can’t receive certain compensation, including a wide range of direct and indirect compensation, such as commissions and other sales-related revenues.

Plan sponsors need to reassess the fees paid for investment products and plan services—and review how fee adjustments will affect participants. This includes looking at the fees for bundled services. For example, anticipated revenue from fund investments in services, such as IRA rollovers, may have affected how recordkeepers price other services.

Other considerations. The new fiduciary rule may impact the demographics of a plan’s participants. Notably, more participants may be motivated to keep their assets in the plan longer to benefit from institutional pricing. Plan sponsors may also consider plan-design changes, including lifetime-income options and decumulation strategies to offer the kind of flexibility provided by IRAs.

Transition Period

Starting June 9, 2017, financial advisors and others who will be fiduciaries under the fiduciary rule will be subject to the “impartial conduct standard.” This means they must (i) act in clients’ best interests; (ii) charge no more than reasonable fees; and (iii) ensure that misleading statements are not made.

There are various ways these fiduciaries can comply. For example, they can qualify for an exemption that would allow the receipt of conflicted compensation by satisfying the requirements of the Best Interest Contract (BIC) exemption. The BIC exemption makes it possible for fiduciary advisors to earn variable compensation and third-party payments. It could also allow investment brokers serving as fiduciaries to earn commissions and proprietary fund shops to earn variable fees on their own investment products.

The DOL has limited some of the procedural requirements for the rule and certain exemptions during a transition period (from June 9, 2017, to January 1, 2018). This period will give service providers added time to ensure full compliance. At the end of the transition period, all requirements will kick in. Of course, the DOL may implement more changes after reviewing the rule as required by the president’s February 2017 executive order.

Fiduciaries’ Next Steps

Plan sponsors need to understand the new fiduciary rule and start incorporating any necessary changes into their fiduciary process. A good start would be to review and understand the following:

  • All service agreements for scope of services
  • Fiduciary status of service providers under the new DOL rule
  • The “reasonableness of fees” with service providers
  • Conflicts of interest with regard to compensation and advice
  • Whether investment information and tools are considered education or advice
  • ERISA fiduciary responsibilities

It’s also important for plan sponsors to review service agreements: Do they need new or different language and representations? Plan sponsors should consider working with a financial advisor or consultant and ERISA counsel to help ensure they’re in compliance.

The new fiduciary rule has placed a renewed focus on fiduciary status and responsibility. It’s a good time for plan sponsors to refresh their understanding of their own fiduciary status and responsibilities as well as those of their service providers. The goal is to be confident that all parties are working in the plans’ and participants’ best interests.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.

The Latest on the DOL Fiduciary Rule: Get Ready, Set…
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