Early Fiduciary Rule Interpretation from ERISA Experts

All told, the Department of Labor (DOL) published nearly 1,000 pages of text in its unveiling of the final fiduciary rule Wednesday morning, with implementation dates ranging from April 2017 through the beginning of 2018.

According to Russ Hirschhorn, a partner in the Employee Retirement Income Security Act (ERISA) Practice Center and the Labor & Employment group at law firm Proskauer, it will “take some real time before the industry has fully digested the rulemaking,” which appears to include a series of key changes from the version proposed in 2015.

“The DOL says it has dialed back some of the requirements in the rulemaking that were challenged by the advisory industry, and that certainly appears to be the case according to the facts sheet the department issued this morning,” Hirschhorn tells PLANADVISER. “But I should also say that I think it’s still too soon to know with real confidence how much they have dialed this back.”

It’s not that he doesn’t believe the DOL when it says it has softened the rule, Hirschhorn says, “but I can tell you that probably nobody has made their way through the hundreds and hundreds of pages of complex language that make up the final rule.” He expects ERISA attorneys and other industry practitioners to slowly digest the rulemaking in the next several weeks. “Some will find they are well prepared, but for others, even with the changes, it will be a real operational challenge to come into compliance.”

At this early juncture, one clear win for the advisory industry skeptics who have opposed the rulemaking is the extended deadline for implementation and compliance, Hirschhorn feels. “According to the facts sheet, the first days of the implementation are not until April 2017, with a second phase in January of 2018, so this phased implementation is a positive thing. We were happy to see that at Proskauer, I can tell you, because we know that will obviously be easier for our clients to meet than a rule fully taking effect in 2016 would have been.”

Hirschhorn concludes that there is even less clarity, at this point, about how the final rulemaking will impact retirement plan advisers who are also active in the individual retirement account (IRA) market. While some restrictions on so-called “IRA cross-selling” have been cut from the final rule, he feels “the way the rulemaking will impact IRA sellers is extremely complicated, and it remains to be seen how this will play out.”

NEXT: Others are more confident 

After a very high-level overview, Michael Webb, vice president at Cammack Retirement Group, feels the DOL has made some significant changes between the most recent proposed rule and the final rule, “easing some of the adviser community's concerns.”

For example, he says it no longer seems that providing the names of specific retirement plan investments as part of asset-allocation modeling will automatically make someone a fiduciary. “A long-time practice of retirement plan recordkeepers, this will continue to be permitted as participant education,” Webb explains. “Under the proposed rule, such fund naming would have been considered an investment recommendation that would have been subject to the fiduciary rules and thus would have been unworkable for recordkeepers, who are not fiduciaries in most cases. It should be noted that the restriction on naming investments will still apply to IRAs.”

Webb adds that another key change, from the advisory firm perspective, is that the exemption from the final rule for larger retirement plans, or the so-called “sophisticated investor” provision, now defines such plans as those with $50 million or more in assets. “The threshold was $100 million under the proposed rule,” he explains.

“In another victory for the financial services industry, those who receive level fees (rates of compensation that do not change regardless of investments selected) will not be subject to the complicated rules known as the Best Interest Contract Exemption,” Webb concludes, adding that the previous BIC structure “would have effectively prevented individuals from advising participants on IRA rollovers if the adviser received compensation from the IRA product.”