The initial effective date for the new Fiduciary Rule was April 10, 2017; however, the Department of Labor (DOL) delayed it for 60 days after the new Administration took office. The DOL was instructed to review the Rule during the delay period to further determine its impact on plan participants. While the retirement plan industry cautiously waited out the delay, the overriding presumption was that the Rule was dead. Surprisingly, the DOL announced on May 22, that the Rule would in fact be moving forward without further delay.
Under the Rule, an advisor making a recommendation or sale as opposed to giving ongoing advice is considered a fiduciary. Previously, only advisors charging a fee for services were deemed plan fiduciaries. Such fees could be hourly or a percentage of assets, but not commissions. As a fiduciary, the DOL requires advisors to act in the best interest of their clients. All fees must be shown in hard dollars and any conflicts of interest disclosed. At the heart of the Rule, is the fact that a fiduciary must recommend investments that are in their client’s “best interest” not investments that are merely suitable based on various needs and objectives. The net effect being a sub-set of advisors who were previously giving investment advice that were not considered fiduciaries, will be considered as such on June 9. Additionally, advisors that give investment advice related to IRAs will now be considered fiduciaries. These “new” fiduciaries are subject to the best interest standard where as previously they were not.
The investment industry and retirement plan sponsors alike have prepared for these new requirements for the last several years; many plan sponsors have already established a relationship with an advisor that meets the fiduciary standard. Additionally, many investment companies have modified their client service model or forgone servicing retirement plan assets to avoid the fiduciary standard.
To the non-advisor community, it seems shocking that advisors were not required to provide investment advice in the best interest of the recipient for a reasonable fee. Does this mean some advisors have been providing advice that is not in a person’s best interest at an unreasonable fee? Yes, it does!
Plan sponsors should be mindful of how the Rule evolves and its impact on the relationship with their advisor. It remains to be seen if any changes will be attempted or provisions are further delayed. Luckily, the DOL will likely focus their initial efforts on compliance with the new Rule as opposed to accessing penalties.
If you have any questions, please contact Aronson Compensation and Benefits Practice Director Mark Flanagan at 301.231.6257.