New DOL Rule Will Impact Several Plan Types | Capital Group

Capital Group Policy Spotlight

August 17, 2016

Impact of the New DOL Fiduciary Rule on 401(k)s, SIMPLEs and Rollovers

Under the new fiduciary rule, advisors will have to look at whether staying in plan is in the best interests of their clients, and document their assessments. Watch to learn more.



Jason Bortz


Jason Bortz: The 401(k) market has been subject to the ERISA requirements since ERISA was enacted in 1974. Many, many retirement plan advisors are used to being fiduciaries. The new rules aren’t going to have a material impact on their business — except for rollovers, where they’re going to have to deal with these new rules, where they’re going to have to decide whether someone is better off staying in plan or rolling over.

There are parts of the retirement plan market where advisors get 12b-1 fees off the plan’s investment options or they use an annuity contract as their platform that pays compensation to the advisor, and so in that area, they are going to have to make sure that they’re getting levelized compensation.

We don’t expect a big impact for retirement plans that pay commissionable compensation, because it’s largely already levelized. It doesn’t vary based on the investment recommendations. It’s not going to be a layup. I think they’re going to have to look at the new world and make sure that they’re aligned with these fiduciary requirements.

Whether rollovers are going to slow after the new rules go into effect I think is an open question and we don’t really know yet. The new rule definitely introduces friction into the rollover process by saying, “Hey, when an advisor gives a rollover recommendation, they’re acting as a fiduciary, and ordinarily they’re going to have to meet the terms of this level fee exemption that’s part of the BIC.” Because they’re acting as a fiduciary, they can only recommend a rollover if it’s in the best interests of the participant. They may be better off staying in plan because the plan has great institutional investment options or the employer is paying all of the fees.

The advisor is going to have to look at that and understand what’s going on inside the 401(k) plan and what’s going on in the IRA. They’re going to have to compare the two and decide what’s best for the participant and they’re going to have to document that contemporaneously. So I think it is going to introduce some sand in the works at a bare minimum. Whether it really moves the rollover business, I don’t know, partly because people roll out of their plans for lots of reasons. They don’t want to stay with their former employer. They’re done. They want out. They don’t want to have any connection to them.

Maybe they want access to advice. A lot of people who are in plan can’t get the access to a professional investment advisor. A lot of plans don’t provide for periodic distributions or ad hoc withdrawals, so the only way to be able to take money out periodically might be to go to an IRA. There are going to be lots of reasons people still want to roll to IRAs, but it is going to be a new world with lots of friction that’s new.

SIMPLE plans are fairly affected by this rule. SIMPLE plans are small business savings solutions, and they often affect really low balance retirement savers, folks who don’t have a lot of money to put away. To pay for the advice, a lot of SIMPLE plans are based on commissionable business models, so they involve traditional A share mutual funds where there’s an upfront load. In order to do that in the new world, folks will need to use the Best Interest Contract exemption. The good news is that the existing IRAs that are funded through SIMPLEs will be eligible for the grandfather rule, so everything through April 10, 2017, is eligible for the grandfather rule.

Going forward if people want to continue doing SIMPLE business on a commissionable basis, they’re going to have to use the Best Interest Contract exemption. The other option of course is to have a fee-based SIMPLE plan, where the advisor’s compensation doesn’t vary at all based on the investment recommendations, and they’re getting levelized compensation. Historically, that hasn’t worked that well in this end of the market because fee-based advice generally isn’t easy or economic for very small balance investors.

There aren’t any special rules for SIMPLE plans in the new rule. SIMPLE plans are treated like any other employer-sponsored arrangement or like any other individual IRA arrangement. Many SIMPLEs today are sold or advised on a commissionable basis involving, say, an A share mutual fund with an upfront load. It works well for the small-balance investors you tend to see in SIMPLE plans.

Going forward those programs are going to need to either satisfy the Best Interest Contract exemption, or be run on a level-fee basis, on an advisory basis.

I think the good news, though, is that the IRAs that have been funded before the effective date of the new rule, before April 10, 2017, will be eligible for the grandfather, but going forward it’s really going to be the Best Interest Contract exemption or a fee-based advisory program.

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