There’s a lot of talk and confusion among defined contribution (DC) plan sponsors of plans as well as investors in DC plans and IRAs about the implications of the DOL conflict of interest rule scheduled to become effective April 10, 2017. There’s even speculation about whether the rule will be delayed or unraveled altogether. So the DOL issued FAQS on investors’ rights and financial advisers as well as questions investors should ask their advisors.
To start, the DOL laid out why it created the rule in the first place concerning advisors which includes:
- Satisfy a professional standard of care when making investment recommendations (give prudent advice);
- Put their customer’s interest first when making recommendations (give loyal advice);
- Avoid misleading statements about conflicts of interest, fees, and investments;
- Follow policies and procedures designed to ensure adherence to the best interest standard and to prohibit financial incentives for advice that is not in the customer’s best interest;
- Charge no more than reasonable compensation for their services; and
- Disclose basic information about fees and conflicts of interest to retirement investors.
Because the rule affects 401k and some 403b plans as well as IRAs and HSAs, plan sponsors are often asked by employees leaving their employment about how to find an advisor and questions they should ask. The DOL FAQ provides some guidance which companies can direct their employees to which includes:
- Is your advisor willing to act as a fiduciary in writing?
- Are they and their firm compliant with the DOL rule?
- What relevant credentials or designation do they have?
- What fees and expenses are being charged? Are they paid from other sources?
- Does their compensation vary by the investments recommended?
- What is their experience? References?
At the root of the problem is undisclosed fees and compensation that varies depending on the investment recommended that may compromise an advisor’s judgment found with many commission based products. The same issue holds for revenue sharing paid by participants out of their investments to compensate DC plan service providers.
For plan sponsors, the stakes will grow when hiring a plan advisor with most having to act as a fiduciary under the new rule.
Hiring and monitoring third parties that act as fiduciaries is an essential fiduciary act and, because many plan advisors also work on IRAs, plan sponsors may be liable for advice given to participants and former employees if that plan advisor was not properly vetted or monitored.
