Another iteration of the Department of Labor (DOL) fiduciary rule is in progress. Proposed in 2023, this version seeks to protect investors by ensuring financial advisors put their clients’ best interest first when recommending retirement investments. The rule is still under consideration, but its outcome could impact how plan sponsors design their retirement plans.
A recent BenefitsPro article highlighted the latest developments in the new DOL fiduciary rule. As far as recent changes to the DOL rule go, the article noted three main points for plan sponsors to focus on:
- “Expanded definition of “fiduciary. The rule broadens the category of those deemed “fiduciary” under the Employee Retirement Income Security Act (ERISA). This means more financial professionals advising on 401(k) plans, including rollovers, are legally obligated to put their clients’ interests ahead of their own.
- Rollovers. There is added scrutiny on rollovers, the process of moving funds from a 401(k) to an Individual Retirement Account (IRA), because rollovers are often seen as points of vulnerability for investors. The new rule places stricter scrutiny on recommendations to rollover, aiming to prevent advisors from pushing rollovers that are not in the investor’s best interest.
- Prohibited transaction exemptions. The DOL is also reworking certain exemptions that allow advisors to receive otherwise prohibited compensation (like commissions) under specific conditions. These reworked exemptions include more rigorous requirements companies and advisors must meet.”
The new regulations will likely compel plan sponsors to make changes to ensure compliance. According to the article’s author, Nathan Boxx, director of retirement services at Fort Pitt Capital Group, “It is expected that there will be an increase in scrutiny when choosing plan advisors. It will become essential for companies to perform a thorough background check on the financial advisors and firms they hire to manage their 401(k) plans. To avoid potential legal issues, fiduciary standards must be met.”
Mr. Boxx also noted that plan sponsors should re-evaluate their plan fees, particularly if they use commission-based advisors. Specifically, they may need to alter their plan’s fee structures to comply with the new DOL fiduciary rule and potentially reassess the range of investment choices available in the plan. “Prioritizing options with lower fees or those less susceptible to conflicts of interest may be necessary,” Mr. Boxx wrote.
Plan sponsors may also need to redouble their efforts to educate employees about investment options, fees, and the benefits of rollovers to help ensure they are able to make informed decisions about their retirement savings.
Mr. Boxx reminded plan sponsors that it’s a good idea to check in proactively to ensure their plans are in compliance with current regulations. Specifically, he noted, “Assess your current advisor relationships, fee structures, and investment options. Examining whether your current service meets your needs could uncover issues whose solutions could have big impacts.”
And Mr. Boxx suggested plan sponsors make sure employees are “in the know” about potential 401(k) plan changes, and ensure they have access to resources that are clear and helpful so they can make informed decisions.
As the DOL fiduciary rule takes shape, more changes are likely to come down the pike. Plan sponsors should review fees, investment options, and advisor relationships now and be prepared to adapt in light of the shifting regulatory environment.
