“It Feels Like I’ve Been Here Before…”
Unless you’ve been in solitary confinement or otherwise “off the grid” in the world of wealth management and retirement accounts, you have probably heard of the Department of Labor’s Conflict of Interest Rule, more commonly known as “the Fiduciary Rule.” The Fiduciary Rule was published in the Federal Register on April 8, 2016, became effective on June 7, 2016, and had an original applicability date of April 10, 2017, with a phased implementation period ending on January 1, 2018. Original time frames were established under President Obama’s administration, but after President Trump took office in January, things began to get “interesting” – for lack of a better term.
On February 3, 2017, President Trump issued a memorandum to Secretary of Labor Acosta to examine whether the Fiduciary Rule would adversely affect the ability of Americans to gain access to retirement information and financial advice and to prepare an economic and legal analysis of the likely impact of the Fiduciary Rule. On March 2, 2017, the Department of Labor (DOL) published a notice, resulting in a 60-day delay in the applicability date, seeking public comments on questions raised on Secretary Acosta’s examination of the Fiduciary Rule and generally regarding the primary exemptions that are allowable under the Fiduciary Rule.
Well, June 9 has passed and the 60-day delay came to an end, and this is what we know about the DOL Fiduciary Rule:
- Redefines the fiduciary standard for Individual Retirement Accounts and qualified retirement plans
- Differentiates between qualified retirement plans and individual retirement accounts in regards to fiduciary activities
- Changes liability scenarios resulting from breach of contract
- Introduces two new prohibited transaction exemptions (PTEs), the Best Interest Contract (BIC) and Principal Transaction Exemption, and amended six existing exemptions
- Adjusts situations in which advisors are seen as fiduciaries and work in the Best Interest of their clients
Although the DOL has a statutory responsibility and broad authority to examine or audit employee benefits plans and plan fiduciaries to ensure compliance with the Fiduciary Rule, compliance assistance for plan fiduciaries or other service providers is also a high priority for the DOL. So what should you do to be compliant with the new rule? I’ll put on my “auditor hat” and tell you to document everything about the following:
- Making a recommendation about the advisability of acquiring, holding, disposing of, or exchanging securities or other investment property
- Providing recommendations regarding rollovers, transfers, or distributions for a retirement plan or an IRA
- Providing a recommendation as to how securities or other investment property should be invested
- Providing recommendations as to the management of securities or other investment property (including selecting third parties to give investment advice or selecting investment account arrangements)
Does your head hurt yet? Well, it probably does, but it doesn’t need to if you document everything! For example, document the following:
- Client conversations regarding discovery of needs and aspirations
- Analysis of current plans, investment products, fees, and costs
- Assessment of solutions for your compensation (breakdown of your overhead costs for holding and execution of trades of various investments)
- Delivery of recommendations
There is good news. Certain plans are not affected by the Fiduciary Rule, including:
- Section 529 plans.
- Non-ERISA section 403(b) plans.
- Funded section 457 plans (both government and nongovernmental).
- Non-qualified plans.
- Health insurance policies, disability insurance policies, and term life insurance policies to the extent the policies do not contain an investment component.
So what should be expected between now and January 1, 2018? All we know for certain is that the future is uncertain. Expect change to the “Final Rule” prior to January 1, 2018. What will change and how will the change impact implementation? That’s the million dollar question.
Wipfli and our colleagues at Wipfli-Hewins are keeping a close eye on things. Please feel free to contact us with questions.