Department of Labor Issues Proposed Fiduciary Rule on Investment Advice
By Mark Johnson, Ph.D., J.D.


Americans’ retirement savings in both traditional defined benefit pension plans and individual account balance plans, such as 401(k) programs have been protected by the Department of Labor (DOL) and the Employee Retirement Income Security Act (ERISA) since 1974.


The rules regarding retirement investment advice have not significantly changed during the intervening decades, even though the shift has been away from defined benefit plans and more toward self-directed IRAs and 401(k)s.


For several years the DOL has been working on a revision to its fiduciary rules to close which some perceived as a loophole that allowed potential conflicts of interest between a retirement investment advisor and plan participants. The intent is that retirement advisers always put the best interests of their clients above their own financial interests. This is particularly important when an advisor provides an investor with guidance on prudent investment options in stocks, bonds, other securities, insurance and banking products, or is managing the account or IRA on behalf of its owner.


On April 14, the DOL released its draft rules in the form a 1,000+ page “Notice of Proposed Rulemaking” (NPRM). The current proposal is seen by many in the industry as an improvement on changes suggested by the DOL in 2010. The earlier plan was withdrawn for further analysis after some stakeholders, including the Securities Industry and Financial Markets Association (SIFMA) and members of Congress, expressed concern that all of the issues were not fully addressed.


Fiduciary Definition and Differing Protections


The basis of the DOL proposal stems from who is considered a fiduciary, or trustee, and differences in fiduciary protections. For example, a fiduciary is required to impartially manage a traditional pension or defined benefit plan to make sure there will be sufficient funds to pay benefits under the plan. In a 401(k) plan, the employer is one of the fiduciaries, choosing investment options that will be offered to employees participating in the plan. All ERISA fiduciaries must act solely in the best interests of the plan participants.


However, IRA and other retirement investors are missing this type of assurance. Many investors look to financial advisers for their expertise in choosing investment products. These advisers—who are currently broadly defined under ERISA and the Internal Revenue Code—can be anyone from brokers to insurance agents, registered investment advisers to financial planners, and are all subject to differing standards.


Many advisers are alleged to have conflicts of interest when offering investment advice, since they can earn payments from recommending certain funds that may not be the most prudent choice for their clients. Also, consumer advocates claim that hidden fees and disclaimers can result in high costs and lower returns for investors.


The proposal revises the longstanding regulation on who is an ERISA fiduciary to more retirement advisers, investment managers and broker dealers and further protects retirement savings. The DOL believes it has put forth a proposed regulatory package that is balanced in terms of increasing protections while minimizing disruptions to good market advice.


The proposed DOL fiduciary rule seeks to accomplish the following:


• Require more retirement investment advisers to put their client’s best interest first, by expanding the types of retirement investment advice.


• Make more advisers fiduciaries and ensure they are held accountable to their clients if they provide advice that is not in their clients’ best interest.


• Preserve access to retirement education.


• Distinguish “order-taking” as a non-fiduciary activity.


• Carve out sales pitches to plan fiduciaries with financial expertise.


• Commit the firm and adviser to providing advice in the client’s best interest.


• Warrant that the firm has adopted policies and procedures designed to mitigate conflicts of interest.


• Disclose any conflicts of interest—like hidden fees often buried in the fine print or backdoor payments that might prevent the adviser from providing advice in the client’s best interest—clearly and prominently.


Feedback Encouraged


Because this proposal will affect millions of IRA savers and retirement participants, the DOL is welcoming feedback during this period of public comment. This process provides many opportunities for the public to contribute including written comments and oral testimony. The proposal is subject to change based on this input.


In May, the DOL granted a 15-day extension to its original 75-day comment period, giving stakeholders a total of 90 days to record their feedback. Public hearings will take place during the week of August 10.


In Summary


After reviewing all the comments, the DOL will determine what to include in a final rule and in the final exemptions. Even if the DOL ultimately issues a final rule and final exemptions, they will not make it effective immediately and probably not until sometime in 2016. Finally, it’s important to keep in mind that while this proposal expands the universe of who is a fiduciary, ERISA’s fiduciary duties are long established and well known.


June, 2015



ABOUT THE AUTHOR: Mark Johnson, J.D., Ph.D. Mark Johnson, Ph.D., J.D., is a highly experienced ERISA expert. As a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert consultant and witness on 401(k), ESOP and pension fiduciary liability; retiree medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in bankruptcy; long term disability benefits; and cash conversion balances.


ERISA Benefits Consulting, Inc. by Mark Johnson provides benefit consulting and advisory services and does not engage in the practice of law.


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