Earlier this month, the Department of Labor released the final fiduciary rule to address conflicts of interest in retirement advice. The rule applies what has been dubbed a “fiduciary standard” to financial advisors who advise sponsors and participants in workplace and individual retirement plans, including 401(k)s and IRAs. Although aimed at advisors providing investment advice, the rule has the potential to also impact both the costs and compliance obligations for plan sponsors.
Viewed as a controversial rule, those in favor of these changes see this expansion of fiduciary requirements a necessity to protect against conflicted advice. In opposition of this view are those that feel these change may mean plan advisors will be less willing to provide needed financial advice.
Essentially, under the new rule nearly all advisors that a plan sponsor may rely on for investment advice will be held to the fiduciary standard. This standard means that they many only offer advice that is in the “best interest” of the plan sponsors and beneficiaries and must disclose any potential conflicts of interest. And if the advisors fail to follow the standard the advisors themselves or the plan sponsors that hire them could be sued by the participants and be liable for ERISA-violation penalties.
A significant cause for concern in the proposed rule was the Best Interest Contract (BIC) Exemption. The BIC Exemption allows investment firms to continue to rely on many existing compensation and fee practices, so long as they meet specific conditions to ensure that their individual advisers are providing investment advice that is in the best interests of the plan participants. Under the final rule, unlike the proposed rule, investment firms can simply mail a notice to their existing clients notifying them that the firm has now taken on these new obligations and the new fiduciary standard.
The final rule does allow advisers and plan sponsors to provide general education—plan information, general financial, investment and retirement information—without activating the fiduciary duties and liabilities.
The DOL chose to take a phased implementation approach with the final rule. The education requirements and investment advice provisions are effective as of April 10, 2017. Other additional requirements under the rule, including documents, forms, contracts, etc. must be modified accordingly no later than January 1, 2018.
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