Fiduciary rule compliance to require ‘all hands on deck’
The Department of Labor’s final fiduciary rules will have far-reaching consequences, even for organizations that don’t feel the rules apply to them. Plan sponsors must also take care because as part of their fiduciary responsibilities they need to monitor what their retirement plan service providers and advisers are doing to make sure they are in compliance with the rules.
Brad Campbell, counsel with Drinker Biddle & Reath LLP in Washington, D.C., said during a recent webinar that the April 10, 2017, deadline for implementation does not give a lot of time to comply with a regulation of this magnitude and that “if anyone out there believes this just isn’t going to affect you in some way, you are wrong.”
He added that this is an “all-hands-on-deck evolution.” Not only will broker-dealers and registered investment advisers have to pay attention to make sure they are not participating in prohibited transactions, but insurance companies and mutual fund companies will have to do the same.
Campbell and Fred Reish, a partner in Drinker Biddle’s employee benefits and executive compensation practice group, talked about how the new rules differ from the current law when it comes to advice. There are four categories for advice covered under the fiduciary rule: Making investment recommendations; making recommendations regarding a distribution or rollover from a plan or IRA, which includes whether to roll over assets or not; recommendations about who should advise a participant or adviser; and recommendations about the type of account a participant or IRA owner should use, either fee-based or brokerage.
Most in the industry agree that some of the more onerous points of the proposed fiduciary rule have been smoothed over in the final version, but that might not stop some from suing over how the rules came to be and the process used to develop them. Congress is expected to pass a bill that would overturn the fiduciary rule, but nobody expects it to escape President Barack Obama’s veto.
“It is unlikely it will move forward with a veto proof majority,” Campbell said.
Many in the industry were worried that basic financial education would be construed as advice under the fiduciary rules, but the Department of Labor clarified that most education is covered. It even stipulated that companies can present asset allocation models for participant education and populate those models with mutual funds from the company-sponsored retirement plan’s core lineup.
And while the DOL relaxed the rules on this topic, they only apply to defined contribution plans, not IRAs, and plan sponsors have a duty to evaluate that the asset allocation models are not biased in terms of revenue-sharing funds or proprietary products, Reish said.
“That worries me a little bit. I don’t know if most plan sponsors are capable of doing that,” he said.
He recommended that insurance and mutual fund wholesalers be cautious. If they are meeting with advisers to explain their products and services, it is assumed that advisers are sophisticated enough to know the difference between a sales pitch and fiduciary advice, Reish said.
When a wholesaler goes face to face with plan participants to talk about their platform, website and plan participant materials, those topics wouldn’t necessarily qualify them as a fiduciary, but if wholesalers meet with participants on a one-on-one basis, “I don’t know what they have to talk about except their products. I can’t think about what they would talk about in terms of services without discussing a specific investment product they manufacture,” Reish said. That may curtail their ability to meet with plan participants.
Most registered investment advisers and some broker-dealers are going to have to implement fiduciary advice programs for plans where they charge a level fee, he said. RIAs will have an easier time of this, but broker-dealers will have to have their most sophisticated plan advisers provide pure level-fee advice.
“That’s already happening and we will see an acceleration of that,” he said.
This will fuel the rise of third-party fiduciaries like 3(21) advisers, who select a range of investments that individual plan sponsors or their advisers can select from that are certified as prudent, and 3(38) advisers who serve as an outside discretionary investment manager who pick the investment plan lineup. They are in charge of monitoring, removing and replacing these investment choices on an ongoing basis.
“I think insurance companies are behind the curve.”
The sooner financial services firms wrap up the major decision-making about how to address the rule, the sooner they can start fiduciary training for advisers, develop policies and supervisory procedures and develop new products or different share classes, Reish said.
“I think insurance companies are behind the curve. They don’t realize the impact it will have,” he added.