Wait Over for DOL Rule – What Does it Mean?

On the eve of the expected April 6^th release of the DOL rule concerning conflicts of interest, it’s worth noting that although the rule will dramatically affect financial advisors, record keepers and broker dealers, it will have an impact on how employers manage their defined contribution (DC) plans as it relates to their advisors and providers. A recent article outlines the issues and potential changes for DC plan sponsors.

The DOL rule would require that more financial advisors act as a fiduciary to the plan and to employees including when they rollover their assets into an IRA. The advisor would be required to act in the best interest of their clients which sounds like a good thing. Some critics claim it would limit access to financial advice because fewer advisors would be willing to act as a fiduciary for smaller IRAs and it would limit education in the plan but others call it a red herring and that the financial services industry will adjust through changes in technology and business models.

The DOL explains the difference between advice and education under the new rule:

The Department’s proposal carefully carves out education from the definition of retirement investment advice so that advisers and plan sponsors can continue to provide general education on retirement saving across employment-based plans and IRAs without triggering fiduciary duties. As an example, education could consist of general information about the mix of assets (e.g., stocks and bonds) an average person should have based on their age, income, and other circumstances, while avoiding suggesting specific stocks, bonds, or funds that should constitute that mix.

So there are two distinct questions for plan sponsors to consider:

1. Is the advisor acting as a fiduciary to the DC plan?
2. Is the advisor acting as a fiduciary to the participants especially when they rollover into an IRA?

More and more advisors have been willing to act as a plan co-fiduciary but the new rule would include even more advisors as co-fiduciaries – it’s important to ask advisors the question and get the answer in writing. Not asking may be a fiduciary breach according to one expert.

When advising whether an employee should rollover their DC assets into an IRA, advisors acting as a fiduciary need to consider two issues, according to ERISA legal expert Fred Reish:

1. Is a rollover suitable based on the cost of the investments, advice and range of available investments?
2. It’s prohibited for the advisor making the recommendation to rollover their assets to receive more compensation.

Best practices: Ask if your plan advisor is acting as a co-fiduciary, get the answer in writing and determine, if they are not, whether you want to hire one. Though advisors and providers who offer unauthorized advice to participants in plan or when they separate are liable, it’s prudent for plan sponsors to understand the relationship as they introduced both the provider and advisor to their employees.