Principal, Groom Law Explain New Fiduciary Rule

A new Q&A pinpoints changes in the final fiduciary regulation.

Principal Financial has partnered with Groom Law Group to publish a Q&A white paper on the new fiduciary rule. It answers such questions as: What is in the new fiduciary regulation and what’s changing? How does the regulation affect 401(k) plan provider selection? What should fiduciaries think about when selecting investments? What are the considerations when weighing active versus passive investments?

“Like advisers, our goal is to minimize disruption for plan sponsors as we work to understand the impact of the new fiduciary regulation,” says Greg Burrows, senior vice president of retirement and income solutions at Principal. “We want to help separate the facts from the myths in this changing environment.”

The white paper underscores the fact that the new rule does not directly change the fiduciary duty of a plan sponsor or retirement plan committee. Instead, plan sponsors will see changes in the way their advisers and service providers may exercise any discretionary authority over the plan’s assets, in addition to altering the way they deliver investment advice for compensation. Principal says that the new regulation “makes it substantially easier for a person to be deemed to be providing investment advice as a fiduciary. In fact, merely suggesting that a plan participant consider an investment could make an adviser a fiduciary.”

With respect to recommending a plan provider or recordkeeper that is not the lowest-cost provider, Principal says that it not a requirement of the new rule. Rather, advisers need to meticulously consider providers’ qualifications and the quality of the services offered—along with the reasonableness of fees charged, both direct and indirect.

NEXT: Investments managed by recordkeepers’ affiliates

As to whether the new rule precludes a sponsor from selecting investments managed by an affiliate of their recordkeeper, Principal says the new rule does not prohibit that. In fact, the courts have determined that bundling investment management and recordkeeper services through a single provider is a common industry practice, the company says.

Principal also says that an adviser can recommend a recordkeeper to a sponsor without being considered an ERISA fiduciary, as long as the sponsor is the one making the final decision.

As for whether the new rule favors actively versus passively managed investments, it favors neither, Principal says. As in every other aspect of managing a plan, fiduciaries must act in the best interest of the plan’s participants and act as a prudent person would act under the same circumstances, Principal says. In fact, “plan fiduciaries can reasonably conclude that a particular actively managed investment that they are selecting for the plan could be expected to outperform a comparable passively managed investment.” That said, Principal reminds advisers and sponsors that plan fiduciaries “who prudently select and monitor investments—whether active or passive—are not liable for the underperformance of the investments.”

A number of other providers have created products or services to help advisers and their plan sponsor clients navigate the new fiduciary rule, including Cetera Financial Group and a new partnership including Vertical Management Systems, Envestnet and United Retirement Plan Consultants.

The Principal/Groom Law Group white paper can be downloaded here.