Dept. of Labor Fiduciary Rule Delay

on 10:36 AM

The Department of Labor’s fiduciary rule currently has an implementation date of April 10, 2017. However, the Department of Labor also has issued a notice seeking comment on the rule and on delaying the implementation date 60 days, until June 9, 2017. The Department of Labor has issued a temporary enforcement policy recognizing any transitional concerns regarding timing wherein if a rule is issued April 10, the Department of Labor will not initiate related enforcement actions during any gap period.

The DOL's rule expands the “investment advice fiduciary” definition under the Employee Retirement Income Security Act of 1974 (ERISA).  It elevates all financial professionals who work with retirement plans or provide retirement planning advice to the level of a fiduciary, bound legally and ethically to meet the standards of that status. While the new rules are likely to have at least some impact on all financial advisors, it is expected that those who work on commission, such as brokers and insurance agents, will be impacted the most.

The Department of Labor’s definition of a fiduciary demands that advisors act in the best interests of their clients, and to put their clients' interests above their own. It leaves no room for advisors to conceal any potential conflict of interest, and states that all fees and commissions must be clearly disclosed in dollar form to clients. The definition has been expanded to include any professional making a recommendation or solicitation — and not simply giving ongoing advice. Previously, only advisors who were charging a fee for service (either hourly or as a percentage of account holdings) on retirement plans were considered fiduciaries.

Fiduciary is a much higher level of accountability than the suitability standard previously required of financial salespersons, such as brokers, planners and insurance agents, who work with retirement plans and accounts. "Suitability" meant that as long as an investment recommendation met a client's defined need and objective, it was deemed appropriate. Now, financial professionals are legally obligated to put their client’s best interests first rather than simply finding “suitable” investments. The new rule could therefore eliminate many commission structures that govern the industry.

Advisors who wish to continue working on commission will need to provide clients with a disclosure agreement, called a Best Interest Contract Exemption (BICE), in circumstances where a conflict of interest could exist (such as, the advisor receiving a higher commission or special bonus for selling a certain product). This is to guarantee that the advisor is working unconditionally in the best interest of the client. All compensation that is paid to the fiduciary must be clearly spelled out as well.  Covered retirement plans include:

  • Defined-contribution plans: four types of 401(k) plans, 403(b) plans, employee stock ownership plans, Simplified Employee Pension (SEP) plans and savings incentive match plans (simple IRA)
  • Defined-benefit plans: pension plans or those that promises a certain payment to the participant as defined by the plan document
  • Individual Retirement Accounts (IRAs)

Read more details on the DOL Fiduciary Rule Explained

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