The final DOL rule conflict of interest rule was released which seems to have made many concessions to the financial services industry
making it more workable. Issues with the rule had not been about its intent – the issues were with the execution and unintended consequences.
The DOL rule will dramatically affect how advisors and their broker dealer or RIA firms interact with ERISA plan sponsors and their participants, especially for IRA rollovers. Most of the rule’s provisions will go into effect April 2017 with others in going online January 2018.
Plan sponsors will likely have to adjust their working relationships with advisors and their firms, as well as with service providers like record keepers, and be more mindful of how these providers are interacting with their employees. Because lawyers, emboldened by recent successes of 401k lawsuits, are bound to carefully review the new rule and look for opportunities.
Some of the specific changes in the finalized rule include the elimination of written contracts between advisors and firms acting as fiduciaries – the industry was concerned about administering individual contracts especially when dealing with call centers. Educational exemptions were clarified and broadened but not as much when advisors are working on IRAs where there is no independent fiduciary to oversee the relationship.
According to a report in NAPA Net:
The rule and exemptions ensure that advisors are held accountable to their clients if they provide advice that is not in their clients’ best interest. If advisors and firms do not adhere to the standards established in the exemption, retirement investors will be able to hold them accountable — either through a breach of contract claim (for IRAs and other non-ERISA plans) or under the provisions of ERISA (for ERISA plans and participants).
The key for plan sponsors is to determine if their advisor is acting as a plan co-fiduciary and to understand how the advisor and the firm they introduced is working with their employees. If the plan advisor is not qualified to be a fiduciary and is not discharging their duties properly, plan sponsors could be at risk. It’s now even more important to make sure that fees are reasonable based on the services provided by the advisor and their firms. And if the advisor working with participants either in the plan or through an IRA rollover is not acting in the best interests of their client, plan sponsors who hired that advisor may be liable.
But even if an advisor is willing to act as a co-fiduciary, the question is whether they have sufficient assets or insurance to pay a legal judgement. Because if they don’t, then plan sponsors have no recourse and may be left holding the bag on suits filed on behalf of the plan participants against the advisor.
