In Memoriam: How the Fiduciary Rule Changed the Retirement Industry

Ever since 2010, the Obama-era proposal to update and expand the U.S. Department of Labor fiduciary standard has been riddled with controversy.

Initially a point of discussion among a small set of policymakers and advisers, the Department of Labor’s (DOL) fiduciary rule has since reached a much wider audience, gaining traction in the pages of mainstream publications such as The New York Times, The Washington Post and local business publications across the country.

As we reflect on the rule’s demise, we also consider its legacy. Though it never achieved the status of a legal mandate, many experts predict the rule will shape the industry for years to come.

Time for reflection

The fiduciary rule encouraged advisers and policymakers to examine the longstanding rules governing retirement plan investment advice through the lens of modern investment offerings.

The first modern rules governing retirement plan fiduciary responsibility were developed back in the mid-1970’s, through the Employee Retirement Income Security Act (ERISA), passed in 1974.  Among many other things, this law brought those who advise on retirement plan investments (as defined by the regulation) under the same fiduciary standards as plan sponsors. Since that time, we have seen the retirement landscape evolve dramatically, particularly with the popularity of 401(k) plans and other defined contribution arrangements offering participant investment choice. However, the fiduciary rules as they apply to investment advice—written at a time when defined benefit pension plans were the standard—have remained largely unchanged. The proposed update to the fiduciary standard was meant to bring virtually all those professionals involved in the investment process, including advisers and brokers, under the same fiduciary umbrella.  

One of the core distinctions between pension plans and 401(k) plans is the degree to which plan participants are involved in the investment process. With pension plans, participants generally have no control over the plan’s investments. With many 401(k) plans, participants must select their own investments and have the flexibility to make changes. Though short-lived, the DOL rule highlighted the need for new guidance that ensures anyone making investment recommendations to a retirement plan is held to a fiduciary standard, as the plan’s investment options and fees will have a major impact on participant retirement outcomes.

Informed advocates

The fiduciary rule empowered plan sponsors and plan participants to act as informed advocates.

The DOL rule might be gone (and with it the requirement for certain parties to now act as fiduciaries), but the discussion around adviser ethics and “good faith” is here to stay. The controversy and debate that has surrounded the DOL rule for the last several years has raised awareness among consumer and business audiences to the point that all advisers should be expected to address fiduciary concerns in client conversations.

Today, more plan sponsors know what questions to ask to better understand both their fiduciary responsibilities and those of their advisers. The conversation helped plan sponsors realize that there are advisers who serve as fiduciaries and others who do not. Whether or not the government demands a higher standard, many plan sponsors will.

Fees and shifting business models

The fiduciary rule opened up the conversation around fees, challenging the traditional model.

The DOL rule mandated a higher level of transparency for those who were not previously required to operate as fiduciaries. For the last several decades, many advisers who were not fiduciaries have operated on a commission basis, with independent, SEC-registered firms generally taking a fee-for-service or formula-based approach. While there are plenty of ethical brokers, and commissions are not inherently “bad,” such arrangements and commissions are more difficult to tie to specific services.  The update to the law was designed to bring awareness to the differences in the two approaches, ideally resulting in lower costs and better retirement outcomes for participants. 

Before the DOL rule, there was a limited understanding of advisers’ fee structures. Since the rule was first proposed in 2010, awareness among plan sponsors has grown, encouraging them to take greater ownership in the plan process and ask tough questions. Plan sponsors should feel empowered to hold advisers accountable and ask questions such as “Are the fees I’m paying appropriate?” and “How do the fees impact my retirement plan outcomes?”

Long-term outcomes

Though implementation of the rule was delayed and the measure eventually struck down, many advisers took a proactive approach when the regulations were finalized back in 2016. While some left the retirement investment advisory space to focus on different specialties, others took immediate steps to increase reporting functions, fee transparency and plan sponsor education.

Because of these changes, we can assume there will be some level of impact on future retirement outcomes—but the extent and nature of this remains to be seen.  Though the rule may no longer be law, we will probably see continued upheaval across the industry. Driven by the desire to stay relevant and competitive in the space, more advisers may opt to abide by the fiduciary standard, whether mandated or not.

Attention from the SEC

The Securities and Exchange Commission (SEC) recently proposed new guidance to more tightly regulate brokers and advisers making securities available to retirement plans and their participants.  Although in the early stages, it is anticipated that the guidance resulting from this regulatory effort will be more workable from an industry standpoint, while improving conditions for 401(k) plan participants and other defined contribution plan investors.

At its core, the DOL rule was an attempt to raise the standard of ethics and transparency in the retirement planning industry and protect the best interests of the plan’s participants. Much like the ancient Greek philosophers, perhaps its greatest legacy is in the questions it dared to ask and the conversations it sparked, even if it didn’t have all the answers.

Scott Gehman is a retirement plan consultant with Conrad Siegel who specializes in plan design, consulting, and administrative services for 401(k)s, profit sharing plans, and ESOPs across a variety of industries, including manufacturing, construction and transportation.

Conrad Siegel is a mid-Atlantic employee benefits and investment advisery firm with offices in Harrisburg, Pa. and Lancaster, Pa.

*All investment advisery services and fiduciary services are provided through Conrad Siegel Investment Advisers, Inc. (“CSIA”), a fee-for-service investment adviser registered with the U.S. Securities and Exchange Commission which operates in a fiduciary capacity for its clients.  Investing in securities involves the potential for gains and the risk of loss and past performance may not be indicative of future results.  CSIA and its representatives are in compliance with the current notice filing registration requirements imposed upon investment advisers by those states in which CSIA maintains clients.  CSIA may only transact business in those states in which it is notice filed, or qualifies for an exemption or exclusion from notice filing requirements.  Any subsequent, direct communication by CSIA with a prospective client shall be conducted by a representative that is either registered or qualified for an exemption or exclusion from registration in the state that the client resides. 

**The opinions expressed in this article are the author’s alone and do not indicate any position held by Strategic Insight, PLANADVISER magazine, or its staff.