Compliance

Plan Sponsors Face Risks in Fiduciary Rule Change

It’s not just financial advisers and investment providers that should be prepping for the final fiduciary rule to emerge from DOL—plan sponsors will likely face changes and new liabilities of their own.

By John Manganaro editors@plansponsor.com | March 15, 2016

Doug Fisher is currently senior vice president for policy development and thought leadership at Fidelity Investments—a role that has had him tracking the forthcoming fiduciary redefinition from the Department of Labor for longer than a decade.

“Since about 2005, when the first rumblings of the rule were coming up, we have been working across Fidelity to respond and understand and comment,” he tells PLANSPONSOR. For example, the firm just put out the Expectations of Upcoming DOL Ruling study, a blind survey of the financial services industry fielded between January 5 and January 12. Participants included hundreds of advisory firms, banks, independent broker/dealers, insurance companies, regional broker/dealers, RIAs, and wirehouses—all the service providers helping plan sponsors deliver retirement benefits.

Fisher says all of these different types of financial services groups are operating under the assumption that the final rule language will emerge this month: “And what they expect the rule to do, mainly, is impose a new disclosure regime, the BIC regime, on advisers engaging participants with Employee Retirement Income Security Act (ERISA) accounts and individual retirement accounts (IRAs).”

The prevailing opinion at Fidelity, Fisher notes, is that it’s still just a little too soon to say with confidence how onerous it will be for advisers (and other firms in the investment services chain) to meet the new fiduciary standard and to use the best-interest contract (BIC) programmed into the proposed version of the rule published last year. Fisher feels that many firms serving plan sponsors will have to use the BIC, “or they will have to move quickly to level compensation and find a way to eliminate any other conflicts. Some firms will have an easier time doing that than others; there is no boilerplate.”

The adviser expectations study concludes that “dramatic change to the way financial services firms and advisers offer investment education to American investors will be needed,” and as such the rule will alter the way retirement recordkeepers and advisers alike receive compensation for the investment products and services they sell and service. 

“All of this matters deeply to the way plan sponsors do their part of the work,” Fisher says. “They must come to a good understand of what the BIC is and why it is important. That’s part of their own fiduciary responsibility.”

NEXT: Changes to watch for

Fisher runs through a list of changes Fidelity would like to see in the final fiduciary rule, though like others he is fairly confident the final rule will look a lot like the proposal.

“On the BIC, for example, that’s one area we think there may be some additional movement, hopefully to make it more end-investor friendly,” Fisher speculates. “It is no secret that many advisory firms and others believe the BIC will be very difficult to execute and may harm participant engagement among those who are interested in getting very quick, one-off advice on basic investment questions. We get 10,000 of those questions a day at Fidelity.”

Fisher says he’s confident in Fidelity’s ability to tackle anything and everything DOL might put in the final rule, but he does not exactly relish the prospect of having to paper that many BICs. “So in that sense, the final shape of the education carve-out will be very important for recordkeepers and third-party advice/education providers,” he says. “This has been noted by prominent ERISA attorneys.”  

Fisher concludes that, while the rule is directed at adviser and provider fiduciary responsibility and transparency, “it will also have a direct impact on plan sponsors’ fiduciary standing and the related liability.”

“I would give the warning to the industry that there are a lot of plan sponsors out there who are not paying enough attention to how this rule will impact them,” Fisher says. “They are not paying enough attention to the potential changes to the products and services currently in their plans, over which they have a fiduciary duty of monitoring and diligence. As the rule is implemented, specific product and provider changes will be necessary. It will not be enough for plan sponsors to react to these changes; they must have a plan in place and a solid understanding of the issues at play.”

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