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RETIREMENT PLAN INVESTOR

Use your plan ID (available on your account statement) to determine which employer-sponsored retirement plan website to use:

IF YOUR PLAN ID BEGINS WITH IRK, BRK, 1, 2 OR 754

Visit americanfunds.com/retire

IF YOUR PLAN ID BEGINS WITH 34 OR 135

Visit myretirement.americanfunds.com

Categories
Fiduciary Responsibility
What the proposed DOL rule could mean to 401(k) professionals
Jason Bortz
Senior Counsel
If enacted, the rule could:
  • Mark the first workable path to a fiduciary brokerage business model — enabling retirement plan professionals to receive investment-based compensation for their advice while ensuring they act in the best interests of their clients. 
  • Accelerate the growth of fee-based advisory business.
     

“Am I a fiduciary?”


It’s a question asked by many retirement plan sponsors. Another common inquiry: “What about my plan professional?” The easy answer to the former is “yes.” And now, a new DOL regulation seeks to help answer the second. Embedded in this controversial rule is a new definition of who would be considered a fiduciary, making it much harder for plan professionals to avoid fiduciary status.


A key point has been the difference between advice that would be considered fiduciary versus that which is merely suitable for a client’s needs or situation (non-fiduciary). Fiduciary status involves a much higher level of accountability and greater attention to potential conflicts of interest.


The new rule affects both retirement plan and IRA business, but its greatest impact is likely to be on plan professionals


In June of 2020, a new best interest rule went into effect. Brought forth by the Securities and Exchange Commission (SEC), Reg BI applies only to broker advice provided to individual investors regarding the sale of securities or retail accounts. It doesn’t extend to recommendations to retirement plan sponsors.


Tightly coordinated with the newly enacted Reg BI, the DOL proposal applies more broadly to registered investment advisers and brokers providing advice to retail clients as well as institutional retirement plan clients. At the same time, it provides a reasonable method for satisfying the requirements of fiduciary status while continuing to receive non-fee-based compensation (commissions, 12b-1 fees, sub-transfer agency fees).


The proposal would only apply to recommendations to retirement plans, participants and IRAs. The impact is however likely to be greatest for plan professionals because the new rule would be enforceable by plaintiffs in the retirement plan context. There is no private right of action to enforce the rule in the IRA context.


In essence, it forces a decision between the following two options:


Option 1
Act as a fiduciary and rely on the proposed new exemption to continue receiving brokerage compensation.


Option 2
Fully embrace a fiduciary fee-based business model and sidestep the requirements of the new exemption.


Key aspects of the DOL rule include:


 

  • A reinstatement of the DOL’s five-part test for determining fiduciary status that was a critical part of the Employee Retirement and Income Security Act (ERISA) Code enacted in 1974. However, this proposed rule also reinterprets the five-part test, expanding the definition of what would be considered fiduciary action. So now, for example, most retirement plan advice and many IRA rollover recommendations would be treated as fiduciary advice.
  • An exemption that would allow investment fiduciaries to receive compensation for nondiscretionary investment advice, as long as they acknowledge fiduciary status in writing and adhere to the impartial conduct standards under current securities law:

1.  Advice must be solely in the best interest of the client.

2.  The compensation paid must be reasonable.

3.  Statements made about the transaction cannot be misleading.

The proposed exemption would be available to registered investment advisers, broker-dealer firms, insurance companies, banks and individuals who are their employees or agents.

  • An annual review must be conducted to ensure compliance with the conditions of the new DOL rule, including exemption requirements. Specifically, the CEO of the broker-dealer firm would need to sign off on the review.

Perspective on relevant fiduciary regulation

 
Investment Advisers Act of 1940
  • Type of professional affected: RIAs
  • Standard of care: Fiduciary
  • Treatment of conflicts of interest: Disclose firm and financial professionals’ conflicts of interest
  • Scope of obligation: Ongoing duty to monitor (absent agreements to the contrary)
  • Status: Current law

 

Reg BI
  • Type of professional affected: Brokers
  • Standard of care: Best interest
  • Treatment of conflicts of interest: Firm must have policies/procedures reasonably designed to mitigate financial professionals’ conflicts of interest
  • Scope of obligation: Transactional (absent agreement to the contrary)
  • Status: Effective June 30, 2020

 

DOL Fiduciary
  • Type of professional affected: RIAs and brokers and insurance agents (including retirement plan professionals)
  • Standard of care: Fiduciary
  • Treatment of conflicts of interest: Same as Reg BI but applies to firm and financial professionals’ conflicts
  • Scope of obligation: By agreement or mutual understanding
  • Status: Proposed and under review

 

Massachusetts state rule
  • Type of professional affected: State registered investment advisers and brokers (including retirement plan professionals)
  • Standard of care: Fiduciary
  • Treatment of conflicts of interest: Advice must be given without regard to conflicts of interest; disclosure is not sufficient
  • Scope of obligation: Transactional
  • Status: Enforced on September 1, 2020; other states either have or are considering proposing their own fiduciary standards


What happens next is uncertain


The DOL rule has just completed its initial comment period. Many firms and professionals are unhappy with the reinterpretation of the five-part test and are grappling with the implications of formally accepting the status of fiduciary. Such a position could increase exposure to class-action lawsuits, even when advice is rendered in the spirit of the client’s best interests.


Once finalized, the DOL rule would become effective in 60 days. The current administration is trying to fast-track the regulation into effect. The outcome of the presidential election will have substantial bearing on the fate of the proposed rule. It appears that a Biden administration would likely block it in favor of their own, possibly stricter, regulation.


As a result, it may be some time before the regulatory landscape solidifies. Firms and financial professionals would be well advised to continue monitoring developments.


For more insights for defined contribution retirement plans, go to our RP Solution Center



Jason Bortz is a senior counsel with 24 years of industry experience (as of 12/31/2021). He holds a juris doctor degree from Cornell Law School and a bachelor’s degree in philosophy from Hamilton College.


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