Americans’ retirement savings in both traditional defined benefit pension plans and individual account balance plans, such as 401 (k) programs, have been protected by the Department of Labor (DOL) and the Law Employee Retirement Income Security System (ERISA) since 1974.
The rules regarding retirement investment advice haven’t changed significantly over the next several decades, even though the shift has moved away from defined benefit plans and toward self-directed IRAs and 401 (k) accounts.
For several years, the DOL has been working on a revision of its fiduciary rules to close what some perceived as a loophole that allowed for potential conflicts of interest between a retirement investment advisor and plan participants. The intention is that retirement advisers always put the best interests of their clients above their own financial interests. This is particularly important when an advisor is providing an investor with guidance on prudent investment options in stocks, bonds, other securities, insurance, and banking products, or is managing the account or IRA on behalf of its owner.
On April 14, the DOL published its draft rules in the form of a “Notice of Proposed Rulemaking” (NPRM) of more than 1,000 pages. Many in the industry see the current proposal as an improvement on the changes suggested by the DOL in 2010. The previous plan was withdrawn for further analysis after some stakeholders, including the Securities and Financial Markets Industry Association ( SIFMA) and members of Congress, expressed concern that not all issues were fully addressed.
Fiduciary definition and different protections
The basis for the DOL proposal stems from who is considered a trustee or trustee and the differences in fiduciary protections. For example, a trustee is required to fairly administer a traditional pension or defined benefit plan to ensure that there are sufficient funds to pay for plan benefits. In a 401 (k) plan, the employer is one of the fiduciaries and chooses the investment options that will be offered to the employees participating in the plan. All ERISA trustees must act solely in the best interest of the plan participants.
However, the IRA and other retirement investors lack this type of insurance. Many investors seek financial advisers for their expertise in choosing investment products. These advisers, which are currently broadly defined in ERISA and the Internal Revenue Code, can be anyone from brokers to insurance agents, registered investment advisers to financial planners, and they are all subject to different standards.
Many advisers are alleged to have conflicts of interest when offering investment advice, as they can earn payments by recommending certain funds that may not be the most prudent option for their clients. Additionally, consumer advocates claim that hidden fees and disclaimers can lead to high costs and lower returns for investors.
The proposal revises long-standing regulation on who is an ERISA trustee for more retirement advisers, investment managers, and brokers, and further protects retirement savings. The DOL believes it has come up with a proposed regulatory package that is balanced in terms of increasing protections and minimizing disruptions to good market advice.
The fiduciary rule proposed by the DOL seeks to achieve the following:
• Requiring more retirement investment advisers to put their clients’ best interests first, expanding the types of retirement investment advice.
• Convert more advisers into fiduciaries and make sure they are accountable to your clients if they provide advice that is not in the best interest of your clients.
• Maintain access to retirement education.
• Distinguish “order taking” as a non-fiduciary activity.
• Build sales pitches to plan fiduciaries with financial experience.
• Commit the firm and the advisor to provide advice in the best interest of the client.
• Ensure that the firm has adopted policies and procedures designed to mitigate conflicts of interest.
• Reveal any conflicts of interest, hidden fees, often hidden in the fine print or clandestine payments that could prevent the advisor from providing advice in the best interest of the client, clearly and prominently.
Feedback is encouraged
Because this proposal will affect millions of IRA savers and retirement participants, the DOL welcomes your comments during this public comment period. This process provides many opportunities for the public to contribute, including written comments and oral testimonies. The proposal is subject to change based on this information.
In May, the DOL granted a 15-day extension to its original 75-day comment period, giving interested parties a total of 90 days to register their comments. Public hearings will be held during the week of August 10.
In summary
After reviewing all comments, the DOL will determine what to include in a final rule and final waivers. Even if the DOL does eventually issue a final rule and final waivers, they will not make it effective immediately and probably not until sometime in 2016. Finally, it is important to note that while this proposal expands the universe of who is a fiduciary, ERISA Fiduciary duties are long established and well known.
June, 2015
