Compliance

PANC 2015: Participant Advice

Under the proposed DOL fiduciary definition, the types of information given to participants are restricted or permitted and the adviser’s compensation model will also be affected. Yet advisers may be more crucial than ever to participants' success.

By Jill Cornfield editors@assetinternational.com | October 02, 2015
Page 1 of 2

As the industry braces for the new definition of fiduciary from The Department of Labor (DOL), what makes the fiduciary proposal so relevant to the industry is its potential impact on compensation, noted Marcia S. Wagner, managing director of The Wagner Law Group, at the PLANADVISER National Conference in Orlando, Florida, on Tuesday.  

“If you are a fiduciary,” Wagner said, “then you cannot receive what is known broadly as variable compensation.” Under the proposed rule, commissions, 12(b)1 fees and revenue would be much harder to justify, and that’s what Wagner said gives the proposal “all its power, its teeth.”

The current Department of Labor definition of fiduciary is more than 40 years old. Under this proposed new standard, Wagner said, all retirement plan advisers are going to be, for the most part, investment advice fiduciaries; those who need or want to use variable compensation will have to operate under the soon-to-be-finalized rules, especially the Best Interest Contract Exemption. Some, on the other hand, might try to keep their counsel within the rubric of education, confining their comments to participants to general information on investing.

The alternative is a close relationship with an Employee Retirement Income Security Act (ERISA) attorney to learn how to stay compliant with the Best Interest Contract Exemption—called the ­“BIC” for short. This exemption from the proposed prohibited transaction rules allows advisers to receive variable compensation, so long as they commit in writing to keeping client interests ahead of their own when making recommendations. Calling the BIC exemption complex, Wagner listed some of the requirements an adviser would need: a contract, robust disclosures about the compensation fee, intensive conflict of interest disclosures. “Only a lawyer can walk you through,” she cautioned.  

Capturing rollovers is a distinct target of the fiduciary rule changes, Wagner said. “The DOL is extremely concerned with the embedded conflict of interest and cross selling, where you take the long-term trust you’ve gained to potentially sell something people don’t need at a higher cost.”

NEXT: Rollover captures are set to become more difficult