On April 6, 2016, the U.S. Department of Labor released the highly anticipated final version of its fiduciary/conflict of interest rule. Brokers, agents and financial advisors recommending investments to retirement plan sponsors and participants will be held to a higher standard than before. The Department of Labor intends to protect investors from high and hidden fees and from being steered into investments that do not serve their best interests.
What can retirement plan sponsors expect from their advisors?
- Fewer hidden fees, more transparent fees and expenses.
- Fewer commission-based fees, more flat fees or fees based on percentage of assets invested.
- More education, less advice. Instead of saying “This particular investment would be good for you,” an investment advisor might say “Here are options that could accomplish your goals, and here is how they work. Now you decide.” Advisors might avoid mentioning specific products or funds.
- More contracts to sign before investment advice will be given. Some contracts would allow investment advisors to receive compensation that would otherwise be considered a conflict in interest as long as the advisor acknowledges being a fiduciary and commits to giving advice that is in the client’s best interest. Other contracts would bind clients to predispute arbitration. However, contracts are not allowed to release an advisor or firm from liability for breach of contract or to prohibit clients from participating in class action lawsuits.
[Related: On-Demand Webcast—Update on the DOL Conflict of Interest Rule]
What should retirement plan sponsors do now?
- Make sure you know who is a fiduciary (which service providers, board members, trustees and staff members).
- Ask your service providers, especially investment advisors, if they consider themselves fiduciaries and document their responses.
- Read all service provider contracts carefully and make sure you understand them. Consider having professional counsel review the contracts.
- Make sure you are aware of and understand how and how much your plan and its participants pay for investment advice and products. Make sure the fees are reasonable—this will involve some legwork on your part.
- Consider and prepare for how this will affect advice and education your plan participants receive when selecting investment options for their defined contribution plan and when considering rolling over a retirement distribution to an IRA.
When does the rule take effect?
The provisions of the rule will be phased in starting in April 2017. Full compliance is required by January 1, 2018. Many financial services companies have already started making changes in anticipation of this rule.
[Related Whitepaper: Financial Wellness and Education in the Workplace: Strategies and Best Practices]
Who will this affect?
This will most noticeably affect small plan sponsors (those with less than $100 million in assets and fewer than 100 participants), IRA owners, and individuals considering rolling over a 401(k) or other plan distribution to an IRA. The rule assumes large retirement plans already have access to fiduciary-level advice.
Long-term, the rule will affect the way in which financial companies carry on business with individuals, small plans and large plans. The number of financial firms available to small plans and individuals might decrease as these firms reassess the profitability of serving clients with lower assets.
DOL Fact Sheet
DOL chart illustrating changes from proposed rule to final rule
How the DOL Fiduciary Rule Will Affect Plan Sponsors, SHRM
Lois Gleason, CEBS
Manager, Reference/Research Services at the International Foundation