In a last ditch attempt to nullify the DOL’s conflict of interest rule effective April 10, 2017, several industry groups including those representing annuity providers have sued the DOL in federal court on many counts including the fact that the rule will illegally creates a new private right of action. The lawsuit and some experts allege that the DOL rule could make it easier for private attorneys to bring class action lawsuits which might have more of an impact on advisors, broker dealers and providers but could also come back to bite companies sponsoring a 401k plan.
The lawsuit alleges that the rule creates a new private right of action which can only be created by an act of Congress. The DOL countered that this right had already existed. The main focus is on IRAs over which the DOL has no enforcement jurisdiction so it will rely on private attorneys to enforce, among other things, provisions of the BICE (best interest contract exemption) which allows advisors to continue to receive commissions rather than level fees as long as they are acting in the best interest of clients.
Under the new DOL rule, more advisors will be considered fiduciaries under the expanded definition of the term. Many cannot or will not be allowed to act as fiduciaries by their broker dealer so they will be working under a BICE – the operative question is whether they are living up to the contract which may be answered in courts.
Even if the DOL rule does not create a new private right of action, it does open the way for more lawsuits as providers will not be able to include class action waivers in their contracts. Class actions make these lawsuits much more lucrative and attractive for attorneys.
Why should plan sponsors be concerned? Most IRAs emanate from DC plans like 401ks. If the advisor hired by a plan sponsor also advises on the IRA rollover and that advisor was selected by the plan sponsor without proper due diligence or oversight, the plan sponsor could be dragged into the class action lawsuit.
The DOL rule dramatically changes how advisors and their broker dealers/RIAs deal with DC plans and IRAs and, as a result, changes the relationship with their plan sponsor clients. It’s imperative that companies understand these changes and to make sure that their advisors are acting properly especially when working with employees on IRA rollovers.
