Even With an Uncertain Future New Fiduciary Rule Has Changed Retirement Plans

December 14, 2016

New fiduciary rule

On April 10, 2017, new regulations are set to go into effect that could significantly change the way employers oversee company-sponsored retirement plans. The changes reflect a broad push by the Department of Labor to ensure that investment advisors and plan fiduciaries are working in the best interests of consumers.

However, the recent election of Donald Trump has raised questions about the future of the new fiduciary rule. Trump and Republicans in Congress have mostly opposed the fiduciary rule, and some expect changes to the rule, or that the new administration will rescind it all together.

With so many items on the new president’s wish list, though, it may be a while before the fiduciary rule is addressed. For now, employers and advisors should continue to prepare for implementation, with the knowledge that things may change again.

What do the new rules do?
The new fiduciary rule is designed to prevent conflicts of interest in the marketing of retirement plans. After the financial turmoil of the last recession, some advisors were criticized for steering consumers to certain products that paid high commissions to the advisors without delivering the best returns for clients. The Department of Labor estimates that consumers could be wasting as much as $17 billion annually on inflated fees.

The new rule prevents investment advisors from receiving commission payments that were common in the past, unless they qualify for certain exemptions (more on that below.) It also makes advisors, in most cases, fiduciaries to the company-sponsored retirement products they market.

Employers have always had a fiduciary responsibility for the employees on company-sponsored retirement plans. However, some advisors have been held to a lower standard by regulators, needing only to meet a “suitability” standard, where recommended investments would fit an enrollee’s general needs and risk tolerance. The higher, “best interest” standard now required means that advisors must reveal any conflicts of interest.

Without proper disclosure, advisors—and the employers who hire them—could be sued by plan participants and face regulatory penalties.

A changing relationship with advisors
Under the rule change, employers in general—and HR executives specifically—will need to pay much closer attention to paperwork and documentation of retirement plans. They should carefully examine the contracts with financial services vendors, and make sure the vendors are complying with the rule change.

They also need to understand the fees being charged and whether they are appropriate. Financial services vendors must document what is being charged, and who is getting paid, under the new rule. There is now a “reasonable compensation” standard for those on fee-based plans, and employers should know whether the financial services vendor’s compensation meets these standards.

Employers also need to ask financial advisors directly if they are considered fiduciaries to the retirement plan. If an agent is a Registered Investment Advisor” (RIAs), then they are held to the highest fiduciary standard.

Some advisors, instead of being RIAs, are operating under the Best Interest Contract (BIC) exemption—also referred to as the BICE—that exempts them from some fiduciary responsibility and allows for commission-based reimbursement. Employers should ask advisors whether they have this exemption. Even with the exemption, BIC-exempt advisors should keep plan sponsors informed of any potential payment conflicts.

Experts say the new rule will encourage advisors to use a fee-based compensation model, rather than the commission-based model. The end goal is to reduce the opportunities for conflicts of interest as advisors market retirement plan products.

The new rule may also change the relationship between advisors and plan participants. Some experts predict that with the rule change, arrangements such as no-fee investment advice, or record-keeping services, might end. The result could be additional costs to employees on company-sponsored retirement plans.

Is it all moot?
With the election of Donald Trump, the nation’s employers and investment industry may see the regulatory climate do a neck-snapping U-turn. It is probably safe to say the Trump administration will emphasize reducing the regulatory burden on businesses anywhere it can.

However, Washington, D.C., is not known for doing things quickly or easily. Some in the industry predict it will take years for the Trump Administration to get around to repealing the fiduciary rule—if it does at all. Financial services companies have already spent considerable resources in preparing to comply with the new standards, so it might cause even more turmoil to upend the law too quickly. With the tea leaves impossible to read at this point, employers are advised to continue to prepare to implement the new fiduciary rule.