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The DOL Fiduciary Rule – What Employers Need to Know

Eric Droblyen

December 29, 2022


On June 9, the Department of Labor's (DOL) Fiduciary Rule took effect and upgraded every stock broker and insurance agent with a 401(k) client to a plan fiduciary under ERISA. However, there is a catch – while these financial advisors were made ERISA fiduciaries on June 9, the DOL won’t “pursue claims against fiduciaries who are working diligently and in good faith to comply with the fiduciary duty rule and exemptions” until January 1, 2018. This transition period gives newly-minted fiduciaries time to fully comply with the rule – which many advisors did not expect to be implemented.

Since the DOL announced it would not delay the Fiduciary Rule on May 22, we’ve received several calls from anxious clients unclear about how the regulation affects their 401(k) plan and/or fiduciary liability. The irony?  None of our clients use a stock broker and insurance agent – which means they aren’t affected by the rule at all unless their plan’s financial advisor gives rollover recommendations in addition to investment advice.

I think it’s safe to say many 401(k) sponsors are confused about the Fiduciary Rule. However, if you’re one of these sponsors, there is no reason to be confused (or afraid) – the rule’s burden falls primarily on financial advisors.  Its complexity arises from the technical exemptions that permit advisors transitioning to fiduciaries to keep certain forms of compensation that would otherwise be banned under a fiduciary advice standard.  You can avoid the rule’s new requirements altogether by not using a financial advisor that needs an exemption to give 401(k) plan advice.

Changes made by the Fiduciary Rule

The Fiduciary Rule made two major changes to the way financial advisors deliver investment advice to 401(k) plan clients:

  • A single (fiduciary) standard of care – All financial advisors that give investment advice to 401(k) plan sponsors and/or participants are now subject to the ERISA standard of fiduciary care. Under this standard, a financial advisor is obligated to give impartial investment advice that puts the interests of their client first.
    • Prior to the Fiduciary Rule, only financial advisors subject to the Investment Adviser’s Act of 1940 (“investment advisers”) were subject to the ERISA standard, while brokers and insurance agents were not. In other words, 401(k) plans with an investment adviser will generally not be affected by the rule.
    • This reform is good news for 401(k) sponsors and participants because non-fiduciary advisors can recommend overpriced investments - with big commission payouts - over comparable, lower-priced alternatives. When a 401(k) sponsor follows this conflicted advice, participant returns are reduced by unnecessary 401(k) fees and fiduciary liability increased.
  • Rollover recommendations – Fiduciary Rule considers IRA rollover recommendations made by a financial advisor to be fiduciary investment advice.
    • To make impartial rollover recommendations, financial advisors must consider the fees, services and investments of both the participant’s 401(k) plan and IRA.
    • These recommendations are fiduciary advice even when the advisor does not otherwise have a relationship with the participant’s 401(k) plan or pick investments for the IRA.

All 401(k) advice is not created equal

While brokers and insurance agents are now ERISA fiduciaries just like investment advisers, these advisors can still differ in one critical respect – how they are paid. Generally, investment advisers are paid “level fees” that don’t change based on their advice, while brokers and insurance agents are paid commissions that can vary based on the funds they recommend.

Commissions create a conflict of interest for financial advisors because they can control their compensation through their fund recommendations. If this conflict causes unnecessary 401(k) fees, fiduciary liability for the sponsor - and now, the advisor - can result. Commissions were outlawed in a 2010 Fiduciary Rule proposal, but permitted by the final rule – after heavy lobbying by the financial services industry – once the advisor satisfies complicated Best Interest Contract Exemption (BICE) rules. These rules include:

  • Acknowledging fiduciary status in writing
  • Adhering to Impartial Conduct Standards, which includes:
    • Giving advice that’s in the client’s best interest
    • Charge no more than reasonable compensation
    • Make no misleading statements about investment transactions, compensation, and conflicts of interest
  • Implementing policies and procedures reasonably and prudently designed to prevent violations of the Impartial Conduct Standards
  • Fairly disclosing the fees, compensation, and material conflicts of interest, associated with their recommendations.

During the transition period, the only requirements of the BICE that apply are the Impartial Conduct Standards. Other requirements of BICE, will not be required until January 1, 2018.

Rollover recommendations trigger new requirements for all advisors

While level-fee investment advisers don’t need to satisfy the BICE rules to give investment advice, they must satisfy certain BICE rules to give rollover recommendations, including:

  • Acknowledge fiduciary status in writing
  • Adhere to Impartial Conduct Standards

Advisors must also document why an IRA rollover is in the 401(k) participant’s best interest.

Just hire an investment adviser for your 401(k) plan!

If you’re a 401(k) plan sponsor, there is no reason to be confused about the Fiduciary Rule – even though the regulation is technically complex – because it’s meant for financial advisors. The most important thing to know? Whether your plan’s financial advisor (if any) needs the BICE to comply with the regulation.

The BICE rules are technically complex and they make it harder to know if your financial advisor is giving impartial 401(k) advice. You want this job to be as easy as possible because conflicted advice can easily lead to excessive 401(k) fees that increase your fiduciary liability. My simple recommendation? Hire an investment adviser that doesn’t need the BICE to deliver fiduciary-grade investment advice.

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