Too Soon to Assume the Worst About Fiduciary Rule

Some industry groups have contended the new fiduciary investment advice rule from the Department of Labor will result in higher costs for plan sponsors and participants and the loss of some services, but others say it is too early to tell.

Hattie Greenan, director of research for the Plan Sponsor Council of America (PSCA), says the council is just digging into the rule and trying to determine the impact would have on plan sponsors and participants. “We’re not sure what the impact will be. We’re most concerned about the impact on small employers, because we feel it will disproportionately affect them,” she tells PLANADVISER. “We want to be careful not to give a knee-jerk reaction. A lot of folks are speculating, but we are going to talk to plan sponsors and ask them how it will affect them.”

Michael Davis, director of institutional client relationships at Calvert Investments, and a former Deputy Assistant Secretary of the DOL’s Employee Benefit Security Administration, agrees it is hard to say with certainty at this point what will change because it is only a proposed rule. He notes that the DOL itself lays out in the proposal situations that may be adjusted before a final rule is issued.

The agency has allowed for 75 days to comment and will also hold a hearing at which people will be able to ask questions. After considering comments and the hearing discussion, it will issue a final rule.

What Davis will say is he thinks the DOL did a good job. The agency observed that the retirement plan landscape has changed from when defined benefit (DB) plans dominated the marketplace and plan sponsors were dedicated to retirement portfolios to the current defined contribution (DC) plan-dominated marketplace. “The rules currently in place are more focused on a sophisticated plan sponsor investor model,” he tells PLANADVISER.

While the new proposal keeps the same focus as the one issued in 2010, Davis calls the best interest contract exemption in the new rules an “even more elegant solution.” The DOL recognizes there are certain business models with certain types of compensation, and provides a path for advisers to get exemptions but make conflicts and revenue models clear to plan sponsors, he says.

Advisers will have to determine if the rules can fit into their business models or not—will they be able to incorporate these elements into their processes, according to Davis. He says the DOL does not want people to lose advice and the best interest contract exemption shows flexibility. But, it is too early to say at this point what the downstream impacts will be; more time and interpretive guidance from DOL are needed.

Jason Roberts, an attorney and chief executive officer of Pension Resource Institute, says plan sponsors should keep in mind that the DOL is not changing what it means to be a fiduciary—a fiduciary still has to act solely in the best interest of participants, use a prudent process, and not do all the things that will get fiduciaries in trouble. “What we’re really looking at is the impact for someone who may not have been a fiduciary under the old rules that will become one under new rules,” he points out.

He tells PLANADVISER a non-fiduciary could decide to levelize its compensation and become a fiduciary, but that may not be easy and some products and models just don’t lend themselves to that. On the other hand, a non-fiduciary may pull back on its services; whatever would make it a fiduciary, it would eliminate from services offered.

The alternative for a person or entity that wants to continue with a service that makes it a fiduciary but cannot level compensation is to enter into a contract with the plan sponsor, participant or IRA account holder and expose compensation. Roberts says contracts with participants or IRA account holders concern him. “That creates a nebulous standard by which an adviser’s conduct will be judged and may trigger more arbitration or lawsuits. Market losses trigger litigation,” he says.

Roberts also has concerns that non-fiduciary advisers that provide education-only services to plan participants will have to change or withdraw their services. (See “Changes Plan Sponsors Would See with New Fiduciary Rule.”) For its part, the DOL says it understands and respects the difference between advice and more general education under the rule language—for instance by providing a blanket exemption for provider call center employees who field incoming questions and concerns from participants.

Just as he believes it is too early to tell what the proposed fiduciary investment adviser rule’s effect on adviser services will be, Davis believes it is premature to say costs will go up; interpretive guidance is needed for more understanding of what the requirements are to comply. “I do think that, overall, the impact will be that plans are offered in a cost-conscious way,” he says. “Costs have been and are going to be a much greater focus in terms of how plans are delivered and what investments are offered.” He says the DOL’s question about including an exemption for recommendations of lowest-fee offerings signals the DOL’s concern about costs.

“I think, overall, plan sponsors should welcome the efforts the department is putting forward because it is meant and designed to give them greater confidence that the advice received is in their best interest, and their participants’, best interest. It’s hard to argue that’s not a great goal,” Davis says.