What does the DOL’s Proposed Fiduciary Rule mean to Plan Sponsors?
In a very, VERY small nutshell, the point and purpose of the DOL’s recently released proposed fiduciary rule is to level the playing field for all financial professionals interacting with retirement plans…that is, group plans (401k, etc) as well as IRAs. It establishes an enforceable fiduciary standard of care DOL believes to be consistent with the Employee Retirement Income Security Act.
The proposal fits in with DOL’s long-term initiatives to improve the quality of retirement plans and advice, but it’s causing waves in the financial community. The waves loosely fall into two camps: those that don’t want the fiduciary liability due to compliance risk, and those that disagree with the way DOL has gone about this. Will the rule stick? Not sure. Yesterday a group filed a lawsuit against DOL.
We already were fiduciaries prior to this, and we don’t do any sort of individual wealth management or financial planning or accept commissions, so we’re not facing nearly the same business implications that many registered representatives, broker dealers, insurance agents, and so on are. They will have to make significant changes in their practices and their compliance departments aren’t particularly thrilled.
But back to you, the plan sponsor. What do the 1,000+ pages mean for you right now? A few things come to mind, whether or not this takes effect in April of next year.
First, take note of DOL’s comment regarding compensation for providing retirement plan services, which we find amusing:
"The Department is unwilling to condone all ‘customary’ compensation arrangements and declines to adopt a standard that turns on whether the agreement is ‘customary.’ For example, it may in some instances be ‘customary’ to charge customers fees that are not transparent or that bear little relationship to the value of the services actually rendered, but that does not make the charges reasonable. 1"
Under ERISA law, reasonable fees are still all a plan fiduciary should pay for plan services. In order to determine reasonable, you’ve GOT to know three things 1) how much you’re paying for services 2) what services you’re paying for and 3) how you are paying the fees. The easiest way to figure it out is to reference the mandatory disclosures you receive from service providers and their contracts. (Please tell me you did not just say, “Contract? For our 401k advisor?” or “What disclosures?” or you’ll hurt our feelings.) Then, benchmark the fees against like plans and like services.
You’ll also need to continue to monitor those fees and the services you’re getting in return, just like you always were supposed to! “Reasonable” is never going to be defined by DOL because it’s a moving target based on the prevailing circumstances of the day. As they put it in the proposal:
"Ultimately, the 'reasonable compensation' standard is a market based standard. 1"
Next, take note that rollovers (IRA, plan to plan, etc.) are affected by the proposed rule. DOL is attempting to elevate the quality of advice and the standard of care given to an employee trying to make a decision about what to do with their retirement money. Again, comparison of the fees, services, and value of the type of transaction should be evaluated before someone takes action to rollover their assets (and this is a best practice no matter if the rule sticks or not).
As a plan fiduciary, avoid administering advice on whether or not an employee should roll their money in or out of the plan, just like you don't render investment advice. A best practice might be to let employees know it’s a good idea to do a comparative analysis when considering a rollover – what fees will they pay for the benefits and services they will receive from your plan versus the outside plan/arrangement.
Last, many financial professionals are in the wait-and-see mode, and others are throwing their hands up at the red tape. Expect that many contracts will change to accommodate new required language and rules of engagement of acting in your best interest. It’s possible your relationship with your financial professional might be dictated and limited by their affiliated compliance department. One thing we are already seeing is that the financial professionals who historically have "accommodated" having retirement plans in their wealth management practice are leaving the space. If you find your company plan's financial professional is stepping aside, we’re still dedicated solely to the space and happy to help!
For another perspective on this subject, you can check out Nevin Adams' recent article on NAPA Net.
1 Federal Register / Vol. 81, No. 68 / Friday, April 8, 2016 / Rules and Regulations 21031