In April, the US Department of Labor (DOL) released the long-awaited and highly contested final rule redefining who is considered a fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA). This revision was designed to address conflicts of interest in retirement advice by applying the fiduciary standard more broadly, to include everyone who provides investment advice to sponsors and participants in defined contribution workplace retirement plans and individual retirement accounts (IRAs). How will the DOL fiduciary rule affect plan sponsors?
What Is A Fiduciary?
For a financial advisor or consultant to be a fiduciary means he has to act solely in the best interest of his client. He has to do the very best for his client regardless of how it affects him, his company, or any other third party.
In the past, only a small portion of those calling themselves financial advisors were held to the fiduciary standard. (as a note, PlanPilot always has been held to that standard). Everyone else was only held to the “suitability rule.” This rule states that the advisor has to give advice that is suitable to the clients’ needs and situation. They are allowed to put their own interests before those of their clients as long as they don’t give bad advice. So, it is not a surprise that the DOL is taking action on this issue.
The New Rules
Previously, to be considered a fiduciary, an advisor had to:
- Make investment recommendations
- On a regular basis
- As part of a mutual agreement or contract
- And that advice will serve as a primary basis for a plan sponsor’s decision
- And that advice is individualized to specific retirement plan
Many advisors were able to avoid a fiduciary responsibility because their advice was not administered on a regular basis or didn’t serve as a primary basis for decisions. Now, only numbers 1, 3, and 5 from above are required to be held to a fiduciary standard. Any specific advice given under contract or mutual agreement now makes the advisor a fiduciary.
Also, any advice given regarding rollovers or distributions from retirement plan accounts falls under the fiduciary standard. According to the US Chamber of Commerce, the new rule “affects how investment advice is provided to every 401(k) plan, every IRA, and every rollover or distribution to or from either.”
Impact On Plan Sponsors
As this new rule is implemented, plan sponsors may see increased costs and compliance obligations. Service providers who did not act as fiduciaries prior to the new rule may increase fees to compensate for their increased responsibility and liability. There will be more paperwork to sign and more factors to keep track of to maintain compliance.
However, you needn’t fear that your entire Human Resources department will now become fiduciaries subject to ERISA. The rule provides a distinction between education and recommendations, allowing for plan sponsors to educate their participants in a general way without subjecting themselves to the liability and compliance requirements under ERISA.
There are also exceptions to protect employers and staff. Even though many HR professionals provide advice as a part of their job, as long as they do not receive supplemental compensation for that advice, are not registered or licensed under state or federal securities laws, or give advice requiring registration or licensure, they are exempt from the fiduciary rule. Also exempt is employees who create reports or make recommendations for their company’s plan.
Important Dates
The new rule goes into effect on April 10, 2017. There will also be a transition period for new documents and contracts and BIC and other exemptions so that they will not be fully effective until January 1, 2018.
What You Need To Do
There are several things you should do in light of the new DOL fiduciary rule:
- Review and update all educational material to make sure it will maintain its non-fiduciary status, especially if it involves references to hypothetical portfolios.
- Review and update any general communications to ensure they do not qualify as fiduciary advice.
- Review plan rollover policies, forms, and practices to ensure they do not trigger fiduciary responsibility.
- Confirm that all internal employees maintain exemption and will not become fiduciaries.
- Review all advisory and sales relationships to see who will have to act as a fiduciary.
- Ask detailed questions of current advisors to understand any conflicts of interest.
- Confirm that your relationship with any existing plan advisors or managers will not be significantly altered under the new rule.
How We Can Help
All of the changes and implications of the new DOL rule may seem like a lot to take on. Luckily, you don’t have to do it alone. PlanPilot is here to help. We are independent retirement plan consultants and we will walk with you and guide you through this transition. Call me today at (312) 973-4911 or email mark.olsen@planpilot.com and we can answer any questions you have or discuss how we can apply our expertise to your unique situation.
About Mark
Mark Olsen is a Senior Consultant at PlanPilot, an independent retirement plan consulting firm headquartered in Chicago. PlanPilot delivers comprehensive retirement plan advisory services to 401(k) and 403(b) plan sponsors. Drawing on over two decades of experience, Mark provides institutional retirement plan consulting to 401(k), 403(b) and defined benefit plans. His specialties include plan governance, investment searches, investment monitoring and plan oversight. Mark is recognized as a leader within the industry and speaks at national conferences including Pensions & Investments, Stable Value Investment Association, and CUPAHR.