September 2017 Newsletter

Fiduciary – The New “F” Word

There has been a large amount of upheaval in the retirement world as of late and it centers around the “F” word. And by “f” word, I mean “fiduciary.” The New Fiduciary Rule means that many professionals in the finance world that weren’t previously considered fiduciaries will now have to take on that title. So, why is that such a bad thing? Well, it’s not per se, but the implications of how this may change the way the retirement financial business and its institutions function may have many cursing its name for a myriad of reasons. But before we get too bent out of shape, let’s break it down and see what we’re truly looking at.

In April 2016, the Department of Labor (DOL) laid out its plan to implement the “New Fiduciary Rule” or “Best Interest Rule.” At its core, the rule raises the fiduciary standard of investment advisers to match that already applied to RIA’s (registered investment advisers). The central focus of the DOL guidance is to protect plan participants from conflicts of interest related to investment advice that could threaten their retirement savings. Since its inception, the rule has been met with confusion, controversy, delays, and lawsuits as providers struggle to understand how the new rule will affect the way in which they do business. The rule, originally scheduled to begin phase one in April 2017, was partly implemented in June. After several delays, further phases of the rule meant to be implemented in January 2018 have now been pushed back to July 2019.

Who is subject to the new rule?

The rule expands the “investment advice fiduciary” definition under the Employee Retirement Income Security Act of 1974 (ERISA). As of June 9, 2017, all financial professionals who provide advice on retirement plans are considered fiduciaries and must act in their clients’ best interests. Previously, only RIA’s who charged a fee for service on retirement plans were considered fiduciaries. While the rule will have an overall impact on the retirement industry, it will cause an especially heavy impact on advisers whose compensation is paid on a commission basis. A fee based adviser, or RIA, gets paid the same amount regardless of the investment offering or investment selection provided within the plan. A commission based adviser can be paid in a myriad of ways from different investment companies. These fees are typically volume based and can vary from fund to fund and even share class to share class. This is not to say that a commission based broker cannot provide good advice for your plan. They did not create the system by which they are paid. But true or not, the DOL views commission based pay as a deterrent to being able to provide objective investment advice to plan sponsors and participants.

Does the new rule only apply to investments in our retirement plan?

No. In addition to qualified retirement plans, the new rule expands the fiduciary standard applied to both traditional and Roth IRA’s. So, any advice or investments offered for plan distributions will be subject to the rule. In addition, Health Savings Accounts (HSAs), Medical Savings Accounts (MSAs), SIMPLE IRAs, and SEP IRAs also fall under the new rule’s protection. Now, a financial professional who advises on the investments in an HSA is considered a fiduciary. The result is that brokers and advisers will be limited to how they can be compensated for the guidance they provide on these types of accounts.

If this is about protection, what’s the downside?

The DOL’s new rule has a large impact on the investment industry. Not only have the compensation models that the rule aims to remove been in place for a long time, compliance with the expanded fiduciary rule is not clearly defined at this point. Moreover, the industry will have to implement sweeping changes to contracts with their advisers, compensation models, systemization and compliance oversight, etc. It isn’t as though they are unwilling, but the scope of the changes to an already heavily regulated industry shouldn’t be minimized. In addition, many wonder if the regulations will even survive the administrative review process. Implementing the change required to handle the increased fiduciary responsibility and proof of compliance may raise the cost of doing business, so plans could see investment fees increase in the future.

Some firms are prohibiting brokers and advisers from giving rollover advice on 401(k) assets and taking up a strictly educational role to avoid liability. Investors that give advice must produce additional documentation on plan fees and services to determine if a rollover is in their best interest, which can prove difficult.

Don’t Get Ahead of Yourself Quite Yet…

So, what does all of this mean? The back and forth nature of proceedings with regards to the new rule is a bit mysterious to many in the retirement and investment communities but there is hope that some further clarity will be provided when the Dept. of Labor releases its proposal. The 18-month delay would allow for the DOL to coordinate with the Securities and Exchange Commission (which could possibly offer up its own fiduciary rule), broker-dealer regulator Finra (Financial Industry Regulatory Authority), and state insurance commissioners.

For now, compliance will be pushed back and the question remains whether the delay is to allow for more efficient implementation of the rule as is or to allow time for revisions, making the outcome even more uncertain.

Whatever the coming months hold for the New Fiduciary Rule, the resulting outcome is going to require a level of greater fiduciary responsibility for those directly involved with influencing the retirement plan process. Despite what possible cost and increased responsibility the new rule may bestow upon us, it is time to accept this new level of accountability as a positive next step in the overall picture of retirement planning. Fiduciary may be an “f” word, but it’s one that we shouldn’t be scared to embrace and say with confidence. Familiarizing yourself with the details of your plan, and your responsibilities to it, is paramount to becoming a successful fiduciary. It’s important to utilize all the information available to you and maintain a strong relationship with your adviser and TPA.

This newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. Readers should not act or rely on any information in this newsletter without first seeking the advice of an independent tax advisor such as an attorney or CPA.