Compliance April 7, 2016

Fiduciary Rule Will Affect Service to Plan Sponsor Clients

Participant education efforts are also impacted.
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When the Department of Labor’s (DOL) fiduciary rule proposal came out last year, there was some concern that it would affect plan sponsors by requiring Best Interest Contracts (BICs) from advisers, even with one-time projects, such as defined benefit (DB) plan annuity purchases, that it would affect retirement education for participants, and even affect advice relating to health savings accounts (HSAs).

The final rule released this week, made some important changes in response to these concerns.

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In a statement, Rich McHugh, vice president of Washington Affairs for the Plan Sponsor Council or America (PSCA), said, “Based on an initial review, it appears that the DOL has made some changes in the rule that should be helpful with respect to providing needed investment education to retirement plan participants, reforming the best interest contract exemption and making the rule more helpful to small employers.”

In discussing the final rule, Labor Secretary Thomas Perez said, “[F]or firms that have millions of existing customers that would require a BIC under the final rule, there are also changes. Unlike in the proposed version, firms can now simply send a notice that tells these clients that the firm has taken on new obligations for them as a result of the new fiduciary standard. An email or letter will suffice when it comes to alerting existing customers of the change.”

Robyn Credico, North America leader of defined contribution consulting at Willis Towers Watson in Arlington, Virginia, explains that under the final rule, recommendations to plan sponsors managing more than $50 million in assets (vs. $100 million in the proposed rule) will not be considered investment advice if certain conditions are met and hence will not require an exemption. There must be a written validation that the plan sponsor has the wherewithal to make investment decisions.

However, for plans with $50 million in assets or less, the plan sponsor and adviser will have to enter into a BIC explaining there are no conflicts of interest and the appropriate fees, Credico says.

NEXT: Education and rollovers

As for the one time use of an adviser for specific projects, such as DB risk transfer, the rule remains the same. These advisers are considered fiduciaries. Lynn Dudley, SVP, global retirement and compensation policy at American Benefits Council in Washington, D.C., explains that the fundamental redefinition of fiduciary that was put forth in the rule proposal still stands in the final rule. The previous five-part test for determining if a person or entity is providing fiduciary investment advice is gone, eliminating the “on a regular basis” standard, she tells PLANSPONSOR.

Credico says requirements about participant retirement investment education have been improved. Advisers, plan sponsors, or providers holding retirement plan education meetings can talk about the investments in the plan. “This was not allowed before,” she points out.

Dudley explains that specific funds can be mentioned, but only if each fund is named. For example, if a participant asks, “Can you tell me about the small cap fund I’m invested in and whether most people my age use that fund,” the plan sponsor, adviser or provider can respond, but must talk about every small cap fund in the plan. “You can’t suggest whether the participant is doing right or wrong by investing in that fund,” she says.

The DOL rule exempted health and welfare plans from its final rule requirements except where they have an investment component, Dudley adds. So if an HSA has an investment component, anyone giving advice about those investments will need to enter into a BIC with the plan sponsor or participant.

According to Credico, advisers helping with rollover decisions are subject to BICs. “Providers and adviser will have to provide participants comfort that there are no conflicts of interest or receive a document about conflicts, and the adviser fee must be independent of the investments selected,” she says.

Even if a participant has been working with the plan sponsor’s adviser for years, at the point of rollover, there has to be a BIC. “It’s a whole new relationship once the participant takes money out of the plan,” Credico says.

NEXT: What should plan sponsors do?

Credico recommends that plan sponsors with more than $50 million in plan assets look at the education provided to participants and the advice they and participants receive to make sure they meet the new requirements. For advice solutions, someone should be identified as a fiduciary.

She also recommends these plan sponsors have an investment committee with the appropriate people in place. To get the exemption, they have to make a statement that they have appropriate people in place to make investment decisions.

As for education, Dudley says in group meetings, there will be a lot of caveats. More general information will be offered and there may be a reluctance to answer individual-specific situations, but educators can direct participants to where they can find answers.

Credico adds that plan sponsors should make sure they are not responsible for plan advisers once a participant takes a distribution. “Make sure you’re not endorsing the plan’s adviser. Make a written communication that once a person leaves a plan, the plan sponsor is not responsible for what the employee does with assets,” she says.

Credico concludes that as sponsors, providers and advisers review the new rule more thoroughly, there will be more questions. But, for plan sponsors it seems the new rule is not as much a big deal as the proposal.

“It’s a lot to process and a big change, and people are figuring out the best way to comply, but the DOL has made it workable,” Dudley says.
Compliance April 7, 2016

Fiduciary Rule Shows Washington Compromise Can Still Happen

More than a few industry insiders and analysts have tipped their hats to DOL and Labor Secretary Perez for listening carefully to criticism and reshaping some of the most controversial elements of the new fiduciary rule. 
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Count Russell Investments directors Jean-David Larson and Sam Ushio among the financial services industry professionals who were grateful to see the Department of Labor (DOL) dial back some elements of its new fiduciary standard.

The final rule isn’t perfect, they stress, but they view it as a genuinely positive next step for the financial services industry and its clients, to be understood in the context of the Obama Administration’s wider effort to boost consumer protections and the stability of the U.S. economy after the 2008 credit crisis. This is clearly becoming one cornerstone of the president’s attempts to solidify his legacy during the waning months of his final term. 

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Larson is director of regulatory and strategic initiatives, while Ushio focuses on the firm’s advisory practice management support business. Like others interpreting the final fiduciary rule language emerging this week from the DOL, the pair say it appears that DOL and Labor Secretary Perez made effective use of the nearly 400,000 formal written comments and hundreds of hours of public testimony to shape the rule into an acceptable final form.

“At Russell Investments we really strive to have a global focus,” Larson tells PLANADVISER. “And from that perspective, we have seen this rule change as a matter of when, not if, for a long time now. The U.K. and Australia have similarly moved in recent years to strengthen advice standards, and it truly was only a matter of time before the movement took hold here.”  

For this reason, Larson says Russell Investments was able to “engage early and often” with the DOL and other stakeholders inside and outside government. “Going from what was proposed to where we are now, it’s a big step,” he says. “It’s a real victory for both the industry and the DOL.” A growing list of financial services firms have echoed this sentiment, such that there has clearly been much less initial criticism of the final rule compared with the two proposed versions from 2015 and 2010. 

Ushio adds that the DOL’s new presentation of the final rule “clearly has adjustments that are going to help mitigate unintended impacts on both the retail and institutional advice markets. The final rule is much more clear that, rather than prescriptively requiring one business model or another, the DOL is interested in assuring advisers adhere to the best-interest standard when dealing with clients. That is the North Star the Secretary has talked about.”

As Ushio and Larson read the final rule, “obviously there’s still going to be a benefit from the regulatory compliance perspective to doing more level-fee and flat-fee business.” But, they say, it also appears that “commissions and sales fees will still absolutely be a viable way of doing business, so long as the best-interest standard is maintained.” Ushio adds: “There may very well be cases, based on the factors such as the size of the client or their particular interests, where a commission-based fee is the right way to go. The final rule makes this clear. Commissions will not be disappearing overnight.”

NEXT: CFA Institute weighs in 

Speaking with PLANADVISER, Jim Allen, head of capital markets policy in the Americas at CFA Institute, also voiced support for the flexible-but-determined approached embodied by the DOL under Secretary Perez.

“I think from our perspective at CFA institute, the most important part in all of this rulemaking and the associated debate is that we maintain a direction towards ensuring that the end investors are given the primary place in our industry,” Allen says. “That is the most important message we have, and it really seems that the DOL and Secretary Perez share that goal. So overall this is a good step, we’re very happy to see that the number of fiduciary advisers will substantially increase.”

Allen agrees with the others that “many of the technical changes we felt may have been needed have apparently been made,” for example increasing the implementation period to 21 months and cutting some requirements that brokers provide forward-looking performance projections on certain products.

“The eight month implementation people were talking about before the final rule language came down was going to be really tight for a lot of firms,” Allen explains. “They were feeling that they would simply have to turn on a dime and make some really challenging decisions really quickly. Now, with the longer implementation period, there is much more space for firms to come up with a thoughtful response.”

Allen also agrees with Ushio and Larson that a lot remains to be seen in terms of how firms will comply and how the industry will ultimately deal with new basic standards for how advisers can get paid and speak with clients. 

“We had some issues with the complexity of this rulemaking, and that complexity is obviously still there,” Allen concludes. “The complexity is probably unavoidable, given the DOL’s objectives and the interests of the industry to avoid complete disruption. It’s a function of trying to improve the standards of client care while simultaneously permitting entities with potentially conflicted models to keep doing business. The complexity comes because there is still a legitimate role for both fiduciary and non-fiduciary advice, and the DOL knows this.” 

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