Compliance April 6, 2016

Early Fiduciary Rule Interpretation from ERISA Experts

ERISA experts warn that it will take some time to judge the final fiduciary rule published by the DOL, given the serious length and complexity of the rulemaking language. 
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All told, the Department of Labor (DOL) published nearly 1,000 pages of text in its unveiling of the final fiduciary rule Wednesday morning, with implementation dates ranging from April 2017 through the beginning of 2018.

According to Russ Hirschhorn, a partner in the Employee Retirement Income Security Act (ERISA) Practice Center and the Labor & Employment group at law firm Proskauer, it will “take some real time before the industry has fully digested the rulemaking,” which appears to include a series of key changes from the version proposed in 2015.

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“The DOL says it has dialed back some of the requirements in the rulemaking that were challenged by the advisory industry, and that certainly appears to be the case according to the facts sheet the department issued this morning,” Hirschhorn tells PLANADVISER. “But I should also say that I think it’s still too soon to know with real confidence how much they have dialed this back.”

It’s not that he doesn’t believe the DOL when it says it has softened the rule, Hirschhorn says, “but I can tell you that probably nobody has made their way through the hundreds and hundreds of pages of complex language that make up the final rule.” He expects ERISA attorneys and other industry practitioners to slowly digest the rulemaking in the next several weeks. “Some will find they are well prepared, but for others, even with the changes, it will be a real operational challenge to come into compliance.”

At this early juncture, one clear win for the advisory industry skeptics who have opposed the rulemaking is the extended deadline for implementation and compliance, Hirschhorn feels. “According to the facts sheet, the first days of the implementation are not until April 2017, with a second phase in January of 2018, so this phased implementation is a positive thing. We were happy to see that at Proskauer, I can tell you, because we know that will obviously be easier for our clients to meet than a rule fully taking effect in 2016 would have been.”

Hirschhorn concludes that there is even less clarity, at this point, about how the final rulemaking will impact retirement plan advisers who are also active in the individual retirement account (IRA) market. While some restrictions on so-called “IRA cross-selling” have been cut from the final rule, he feels “the way the rulemaking will impact IRA sellers is extremely complicated, and it remains to be seen how this will play out.”

NEXT: Others are more confident 

After a very high-level overview, Michael Webb, vice president at Cammack Retirement Group, feels the DOL has made some significant changes between the most recent proposed rule and the final rule, “easing some of the adviser community's concerns.”

For example, he says it no longer seems that providing the names of specific retirement plan investments as part of asset-allocation modeling will automatically make someone a fiduciary. “A long-time practice of retirement plan recordkeepers, this will continue to be permitted as participant education,” Webb explains. “Under the proposed rule, such fund naming would have been considered an investment recommendation that would have been subject to the fiduciary rules and thus would have been unworkable for recordkeepers, who are not fiduciaries in most cases. It should be noted that the restriction on naming investments will still apply to IRAs.”

Webb adds that another key change, from the advisory firm perspective, is that the exemption from the final rule for larger retirement plans, or the so-called “sophisticated investor” provision, now defines such plans as those with $50 million or more in assets. “The threshold was $100 million under the proposed rule,” he explains.

“In another victory for the financial services industry, those who receive level fees (rates of compensation that do not change regardless of investments selected) will not be subject to the complicated rules known as the Best Interest Contract Exemption,” Webb concludes, adding that the previous BIC structure “would have effectively prevented individuals from advising participants on IRA rollovers if the adviser received compensation from the IRA product.”

Compliance April 6, 2016

Most Reacting Positively to Fiduciary Rule

However, a few industry groups are still expressing concerns.
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The Department of Labor (DOL) has finally issued its final fiduciary rule (or what it calls the conflict-of-interest rule), and comments from consumer and financial industry groups have been pouring in.

While most are still digging into the details of the final rule, the initial response has been mostly positive. The final rule includes changes the DOL said were in response to industry concerns.

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U.S. Senator Ben Cardin (D-Maryland), a member of the Senate Finance Committee, said he is reviewing the final rule to make sure it is workable. “A best interest standard is key to ensuring Americans receive financial advice they can trust and to combatting truly abusive behaviors in our financial system. As I have said throughout this rulemaking process, it is critical that a final fiduciary rule be workable and useable, and enhance savings opportunities and retirement security for small businesses and moderate income families. I look forward to reviewing the announced changes with these concerns in mind,” he said in a statement.

Consumer groups were especially pleased with the final rule. Nancy Zirkin, executive vice president and director of policy at The Leadership Conference on Civil and Human Rights, said, “This common sense rule will ensure that when working Americans turn to financial professionals for help, they will get honest advice that’s in their best interest—not a self-serving sales pitch. We applaud the Administration and Secretary Perez for taking this much-needed step in improving an outdated system that has cost working and middle-class families billions of dollars in retirement savings due to biased, unethical financial advice. This long overdue rule will protect Americans from the conflicts of interest that allowed advisers to reap excessive profits and kickbacks while costing retirement savers more than $17 billion a year. Today’s announcement will help all Americans—whether they can save a little or a lot—retire with dignity.”

The Consumer Federation of America (CFA) Financial Services Counsel Micah Hauptman, stated, “While we will conduct a more detailed analysis of the rule over the coming days and weeks, our initial review indicates that the rule is a huge win for consumers. It appears that the rule properly closes the loopholes in the current rule so that financial professionals can no longer evade their obligation to serve their customers’ best interest… At the same time, the DOL has offered a balanced approach that reflects considerable input from a variety of stakeholders.”

AARP Executive Vice President Nancy LeaMond, said, “Today marks a tremendous victory for consumers. The new rules ensure that anyone who is saving for their retirement will know that the advice they receive must be in their best interest. This is simply common sense, and it is common practice for many financial professionals already.”

NEXT: Many appreciate the changes DOL made

Erin Sweeney, of Counsel at Miller & Chevalier, noted some of the significant changes between the final rule and the proposed rule. “The DOL eliminated some of the most contentious disclosure requirements from the proposal, including eliminating the requirement to develop investment projections and distribute an annual disclosure to investors,” she noted.

Sweeney also notes that the final rule exempts plans covered by the Employee Retirement Income Security Act (ERISA) from the requirement that a fiduciary investment adviser or financial institution enter into a written contract with an investor prior to making a “recommendation.” Although IRAs and non-ERISA plans remain subject to the written contract requirement, the final regulation clarifies that the contract provisions can be incorporated into account opening documents. Moreover, the regulation makes clear that existing clients need not execute a new written contract—instead, advice providers can notify current clients of the amendments and if the client does not object to the modifications, the new provisions will become part of the existing agreement between the advice provider and the investor. Along the same lines, the DOL incorporated a grandfathering rule for existing arrangements. 

“Another notable change is that the DOL eliminated the list of approved investments and indicated that advice providers are permitted to provide investment advice with respect to all asset classes to investors. The DOL also expanded the ability of plans with less than 100 participants to obtain investment advice from an advice provider without that provider becoming subject to the fiduciary rules. Finally, the DOL also clarified what is not covered—the final rule spells out the DOL’s view that health, disability and term life insurance policies are not subject to the fiduciary rule. Similarly, the DOL reserved all appraisal and valuation issues for a later rulemaking,” Sweeney stated.

Rob Foregger, co-founder of NextCapital, said, “The DOL has made very sensible amendments to the proposed rule. The final result strikes the right balance.”

LPL Financial seemed to agree, issuing this statement, “Upon initial review of the Department of Labor fiduciary rule, LPL Financial is pleased by what appears to be positive changes implemented in the rule and appreciates the Department of Labor’s willingness to listen to concerns about protecting choice for investors. In particular, we are encouraged by the increased time frame for implementation, the ability to easily enter into the Best Interest Contract with our existing clients, and the freedom to recommend any assets that are appropriate to help investors save for retirement.”

NEXT: Still concerns

Despite mostly positive reactions, there were some groups that still expressed concerns with the final rule.

Kenneth E. Bentsen, Jr., SIFMA president and CEO, said, “As with the prior proposal, this final rule is voluminous and every word matters. It will take time to review the rule to determine its impact on investors and their ability to save for retirement. SIFMA has long supported a best interest standard for all advisers, yet we remain concerned that the DOL's rule could force significant changes to current relationships, which may leave clients without the help they need to prepare for retirement, at a time when we all agree that more can and should be done. While we continue to believe the Department's methodology is greatly flawed and lacking sufficient empirical basis, a poorly drafted rule could result in unnecessarily raising costs for investors while limiting their choice, a concern shared by many commentators and other regulators.”

The Financial Services Roundtable (FSR) said it will be analyzing the final rule to determine any appropriate further action. “Policymakers should do everything they can to help Americans be more prepared for retirement and not create red tape that makes saving for retirement more difficult,” said FSR CEO Tim Pawlenty.

FSR also noted that the DoL’s fiduciary proposal has triggered significant public policy and implementation concerns from the financial services industry, academics, policy experts and elected officials from across the political spectrum.

The Insured Retirement Institute (IRI) stated that it made a point to make the Administration and Department of Labor aware of how its fiduciary rule proposal would limit consumers’ choices for retirement products including lifetime income strategies. IRI President and CEO Cathy Weatherford said, “In addition to concerns about limited consumer choice on lifetime income products, IRI and its member companies, along with hundreds of members of Congress on a bipartisan basis and thousands of other commenters, have been concerned that the rule as proposed would restrict access to retirement planning advice for younger savers and those with modest savings.

“We have provided considerable, constructive input to the Department of Labor, the Administration, and policymakers on Capitol Hill to help address these concerns. Through our comment letters, testimony and meetings with regulators, we have provided specific revisions to ensure retirement savers can continue to access retirement planning advice and a full array of lifetime income options. We will carefully examine the rule in its final form to determine if these important changes have been made to avoid any harmful consequences for retirement savers.”

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