Plan Sponsors, Advisers Must Move Forward on Fiduciary Rule Compliance

Plan sponsors are reminded of the rule's provisions regarding education.

By John Manganaro | May 24, 2017
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The U.S. Department of Labor (DOL) has confirmed that it will not seek to further delay the June 9, 2017, applicability date of the new fiduciary rule defining investment advice and establishing the best interest contract exemption (BICE) and other related exemptions under the Employee Retirement Income Security Act (ERISA).

The effect is that the policing power of the DOL will be greatly expanded, reaching over individual retirement accounts (IRA) and the vast majority of investment and advice providers to defined contribution (DC) retirement plans. Suffice it to say, this is a surprising outcome given that the new fiduciary rule and its accompanying exemptions are signature Obama-era regulatory actions that have been flatly criticized by the new president and many members of the Republican Congressional majority.

It stands to reason that the administration won't aggressively enforce the new standards, but it must be observed that the fiduciary rule effectively establishes new opportunities not just for the DOL to pursue litigation—but also for broader private litigation alleging fiduciary breaches. In other words, just because the DOL will not aggressively enforce this new rulemaking, this does little to address the fact that private litigators will also have a wider opportunity to allege fiduciary breaches under ERISA.  

Timely analysis shared by the Wagner Law Group rehearses some other considerations for retirement industry professionals. As the analysis lays outs, technically speaking the DOL has formally started the implementation process, issuing a temporary enforcement policy and a new set of Conflict of Interest FAQs that focus on the transition period stretching from June 9, 2017, to January 1, 2018. This action follows the DOL’s April 7, 2017, final rule which delayed the applicability date by 60 days from April 10, 2017, to June 9, 2017.   

“As a result, June 9 is the date on which persons who provide investment advice (including rollover advice) for a fee or other compensation (direct or indirect) will be deemed to be fiduciaries under the fiduciary rule. During the shortened transition period (June 9, 2017 to January 1, 2018), financial institutions wishing to rely on the BICE, the Class Exemption for Principal Transactions or Prohibited Transaction Exemption 84-24 in order to receive variable compensation related to the advice they give, need only comply with the respective Impartial Conduct Standards (ICS) in these exemptions,” the Wagner analysis explains. “For the BICE, the ICS consists of three component standards: (i) receiving no more than reasonable compensation, (ii) refraining from making materially misleading statements, and (iii) providing advice in accordance with the best interest standard of care. The best interest standard has two chief components: prudence and loyalty.”

The FAQs state that under the prudence standard, advice given must meet a professional standard of care as set forth in the BICE, and that “under the loyalty standard, the advice must be based on the interests of the customer, rather than the competing financial interest of the adviser or the firm.”

NEXT: Legal considerations for the transition period