A few weeks ago, the Department of Labor (DOL) announced a new fiduciary ruling. The purpose of the rule was to impose a fiduciary standard on any advisor who provides advice or input regarding retirement accounts. The new rule updates a 40-year-old regulation to reflect today’s investment marketplace and to offer improved protections for consumers saving for retirement.
As a bit of history, the DOL’s purpose in issuing these new rules was to close “loopholes” in the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986, which enabled the securities industry to create “Individual Retirement Accounts” (IRAs) that did not provide investors the same investor protections offered by other retirement products.
Here are some of the more noteworthy changes the new ruling covers. Information on the complete DOL Fiduciary Standard rule can be found in this document.
- Longer Implementation: Implementation of the rules will be phased in over the course of 21 months to give brokers time to adapt their business model when working with retirement customers.
- New Customer Accounts: Service providers can include the best-interest contract exemption (BICE) as part of the documentation clients must sign to open an account. This removes the possibility of fiduciary liability for marketing to potential new clients.
- Marketing of Plan Roll-Overs: Recommendations about how to invest client money and whether clients should take money out of a retirement plan such as a 401(k) now become fiduciary in nature.
- Education: There is now greater leeway on educational exemptions. This is particularly useful to companies which want to ensure employees receive basic investment information. In contrast, exemptions are stricter with regard to individual retirement accounts. In these cases the DOL treats references to specific investment options as advice rather than education.
- Low-Fee Products: Service providers do not have to recommend the lowest-cost investment option if a more appropriate option better suits the clients’ needs.
- Grandfathering of Existing Arrangements: Service providers can continue to conduct business with clients under agreements signed before the rule becomes effective. This includes compensation from recommendations to hold and systematic purchase agreements. .
- Insurance Products: The BICE allows advice relating to insurance products. Disclosure requirements for these products will be more compatible with the way that insurance products are sold. This also includes an exemption for fixed-rate annuity recommendations, but not variable-rate annuities.
In the end, the DOL rulings should have little impact on the relationship we have with our current customers because, we have always adhered to the Fiduciary Standard. If you have any questions on how the DOL ruling impacts you, please feel free to contact the Financial Fiduciaries team.