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.
The Fiduciary Rule made two major changes to the way financial advisors deliver investment advice to 401(k) plan clients:
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:
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.
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:
Advisors must also document why an IRA rollover is in the 401(k) participant’s best interest.
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.