Conflicted By a Conflict of Interest

The Department of Labor today released long-awaited regulations that make big changes to the way retirement advice is delivered. The final "new fiduciary rule" was announced after numerous years of discussions, lobbying, comment periods, and further considerations. The impetus for the new regulations was that the prior rule allowed for conflicts of interest and biased guidance. With the objective of toughening the oversight of financial professionals who are paid to give retirement advice, the new Conflict of Interest rule requires brokers and certain other individuals serving as fiduciaries to be held to a higher standard.

Due to the higher standard of care mandated, a stricter fiduciary standard is imposed. Prior to the final ruling, brokers are held only to a suitability standard, a weaker burden that the administration, consumer advocates and other critics say permits brokers to sell customers high-fee products that erode their returns. In a nutshell, the rule makes providers of advice and products to many 401(k) plans and all IRAs fiduciaries. It will also require substantial new disclosure requirements, and it is expected to move many commission-based brokerage accounts to a fee-based model.

Under the stricter standard, brokers must place their clients' interests ahead of personal gain when they make recommendations for retirement accounts; they must offer financial advice in their clients' best interest, as opposed to what it was before, which was the requirement that they only offer "suitable" advice.

The rule potentially has an impact on employer-sponsored plans. How might this affect employers/plan sponsors? Simply put, most advisers representing the plan will have to act as a fiduciary. The biggest potential impact will be regarding the continued ability of an adviser or record keeper to provide education without acting as a fiduciary, as well as how they are compensated.

In addition, what kind of assistance will advisers be able to give to terminated employees? Though experienced plan advisers might be more prepared to act as a fiduciary on IRA rollovers, the problem is that, under the new regulation, plan advisers will not be able to charge participants more on their IRA rollover than they charge the plan. Advisers restricted on providing education or helping terminated employees could affect outcomes and the financial wellness of departing employees.

Some questions to consider are:
  • Do any of your current plan service providers, such as your plan's broker, registered investment adviser, or record keeper, provide fiduciary services to the plan? Are they a 3(21) co-fiduciary on the investment selection or a 3(38) fiduciary where they have taken on the responsibility of choosing the investments for the plan?
  • If your current service providers are not fiduciaries, the question becomes, will the new fiduciary rule cause them to now be a fiduciary?
  • Will the new rules could prompt brokers to stop serving accounts with smaller balances?
  • Will the new rule create new costs for providers and employers that will ultimately be passed on to savers, ultimately pricing lower-account balance holders out of the advisory market place?
  • What kinds of conversations do your call center "advice" individuals provide active, terminated, and retired employees?

It is important to understand whether or not your current providers are acting as fiduciaries because of the higher standard of care this causes them to be held to, as well as the limiting of liability for the plan sponsor and/or their retirement plan committee.

Full compliance with the new rule is required by January 1, 2018, which was a change from the original proposal deadline. Other provisions in the proposal have been eliminated, and the "Best Interest Contract Exemption," which will be required for advisers to sell commission-based products, has been significantly streamlined.