The final version of the fiduciary rule has landed. The Department of Labor released the amendment to the Employee Retirement Income Security Act in early April. New revisions came on the heels of a December proposal that was met with criticism from the financial industry.
Why the need for change?
Conflict of interest between investors and advisors is the driving force behind amending ERISA. There are advisors who sell investors into high-cost products that yield more commission dollars, but don’t necessarily benefit their clients. That conflict of interest leads to an average of one percentage point lower annual returns on retirement savings. Cost-wise, that amounts to an investor loss of $17 billion per year.
What has changed about the DOL Fiduciary Rule?
In addition to 401(k) savings plans, IRAs and employer retirement plans will now be subject to fiduciary duty. Everything from the advising process on through to the sale of those products must be in the investor’s best interest. According to Labor Secretary Thomas Perez, “putting clients first is no longer a marketing slogan, it’s the law.”
That doesn’t mean that the law is free from exemptions. There are several scenarios that would put advisors in violation of their fiduciary status. DOL came up with a Prohibited Transaction Exemption (PTE) called the Best Interest Contract Exemption. BICE stipulates that the advisor may still engage in and be compensated for recommendations in select situations.
For example, a client may want to roll over their 401(k). An advisor can take that low-cost 401(k) and roll it over to a high cost IRA, provided that a Best Interest Contract is in place and the advisor follows the stipulations outlined, acting in the best interest of the client. While the proposal from December included a list of products advisors could recommend, the final rule removed that list altogether. It also eliminated the annual disclosure requirement and a call for investment projections.
Further restrictions were placed on 401(k) plans which are already subject to fiduciary duty under the current law. The new rule mandates that advisors with less than 100 participants or $50 million in assets will now have to operate under the BIC exemption.
In the December proposal, it was unclear how much paperwork the Best Interest Contract would include. The final rule clarified that just one BIC would be necessary between the advisor and their client. Investors will not be required to sign a new contract every time they speak with a different advisor at the same firm.
What about existing investments?
The new fiduciary rule does include a Grandfather provision. Advisors can still receive compensation from assets acquired through the previous compensation structures. Any new or additional advice regarding those assets will be subject to the new legislation.
When does the new fiduciary rule go into effect?
The new legislation goes into effect on April 10, 2017. Full compliance will be phased in by January 1, 2018.