President Trump signed a resolution passed by the House and Senate overturning the DOL rule about city- and municipality-run retirement plans for private-sector workers.
President Donald Trump has signed a resolution overturning a Department of Labor (DOL) rule
that would allow cities and municipalities of states to offer
retirement plans for private-sector employees that would be exempt from
Employee Retirement Income Security Act (ERISA) provisions.
Another resolution
that would overturn a DOL rule that would allow states to offer
retirement plans to private-sector workers that would be exempt from
ERISA is pending Senate approval before going before the President.
Following introduction of the two resolutions in the House in February, the resolutions were introduced in the Senate in March.
No cities have yet established such plans, though some, such as New York, have proposed them, but several states have. It the second resolution is signed by Trump, it seems they would have to be subject to ERISA provisions.
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According to a new Morningstar report, the Obama-era
Department of Labor (DOL) conflict of interest reforms, while
facing an uncertain future, have already promoted real change among advice
and investment product providers working under the Employee Retirement Income
Security Act (ERISA).
In particular, Morningstar has measured a strong increase in
the offering of two relatively new mutual fund share classes, known as
“transactional” shares and “clean” shares. As the firm explains, the first share
class, commonly referred to as “T shares,” aims to help financial advisers
maintain their traditional business model—selling mutual funds on
commission—while complying with the letter and spirit of the new conflict of
interest rules.
They key development around T shares is that they feature
uniform commissions, Morningstar explains, “thereby reducing or eliminating
financial advisers’ conflicts of interest in making recommendations to clients.”
As Morningstar explains, the second share class, “clean”
shares, “help financial services companies that wish to shift
to a ‘level fee’ model in which advisers’ compensation only comes from a
level charge on a clients’ assets and not from any varying third-party
payments.”
Clearly the developing use of these two share classes will
be influenced by the future of the fiduciary/conflict of interest rules, yet client demand for fairness and transparency is also driving the trend.
Morningstar observes the rulemaking was originally scheduled to be applicable
on April 10, 2017, but the DOL has taken steps to delay it until June 9, 2017. For
now the rule is otherwise intact.
Already Morningstar has measured a real reduction in promotion of
“A shares,” which have been a traditional and widely used package for adviser-mediated access to mutual funds in retirement plans. Such shares generally “front a sales load
that investors pay directly to the financial institution selling the mutual
funds, some of which the advisers keep as commission, and these loads vary.”
Morningstar warns this variation can create, at the very least, the appearance of an incentive for advisers to
recommend a fund with a higher load, “as the adviser stands to make more money
from such a recommendation.”
NEXT: Envisioning the
impact for flat-fee RIAs
Morningstar goes on to predict directly that mutual fund
companies will create more than 3,500 new T share-based products in the coming months, many tailored specifically for
advisers to sell to individual retirement account (IRA) and defined contribution (DC) plan investors, “and
ultimately this share class may supplant A shares in brokerage accounts as
well.”
The research acknowledges that many financial services
companies do not sell mutual funds on commission: “Rather, they charge a fee
for advice as a percentage of assets under management and generally act as
fiduciaries.”
The firm anticipates more advisories to move in this
direction: “They can choose to comply with the rule by acting as level fee
fiduciaries, which in turn has spurred the development of clean shares.
Qualifying as a level fee fiduciary could reduce financial institutions’ legal
risks but means that fees and compensation may not vary based on the
investments advisers recommend. As many mutual funds pay a variety of fees to the
financial institutions that sell their funds—and as these fees vary—the conflict
of Interest rule makes them difficult for financial advisers to offer while
qualifying as level fee fiduciaries.”
Morningstar concludes that, conceptually, “clean share classes
would simply charge clients for managing their money (and other associated
expenses) without indirect payments—fees charged to investors by the fund company
that they in turn send to an affiliate or third party for services other than
managing a portfolio of stocks or bonds.”
This would in effect “strip all these indirect payments
away, leaving it to distributors to charge investors directly for any services
rendered, such as holding their shares, paying out dividends, operating a web
site and call center, and so forth.”