Decoding DOL's Final Fiduciary Rule
Now that the Department of Labor has unveiled its long-awaited fiduciary rule, experts discuss the impact it will have on HR organizations going forward.
By Carol Patton
The Department of Labor just released its much-anticipated final fiduciary rule. Should HR professionals be worried or concerned?
Not exactly, according to legal experts, who say the same regulation had been in place for roughly 40 years. Some of the changes are positive and better reflect the evolving retirement landscape.Â The regulation really focuses on how investment advisors are paid. But for some plan sponsors, there could be a ripple effect.
In the past, some observers believed that investment advisors were taking advantage of employees who were not investment-savvy. In some cases, advisors would push or recommend inappropriate investments over more suitable stocks or mutual funds, for example, because they made more money in fees.
"A lot of what the DOL wrote about was there's a lot of money that's being taken out of retirement savings because of this inappropriate advice, that it hurts people trying to save for retirement because they have less to accumulate," says Robyn Credico, defined contribution consulting leader at Willis Towers Watson in Arlington, Va.
The new rule introduces a higher sense of obligation, meaning that investment advisors must focus on what's best for the plan participant, not on high commissions.
Many are scrambling to decipher the regulation, which narrows the definition of fiduciary to someone who gets paid specifically for offering investment advice.
Advisors and plan sponsors offering education to participants about the plan aren't subject to this rule, Credico says, adding that they can continue educating people on how to save for retirement without being considered a fiduciary or triggering fiduciary responsibilities. "Everyone was really nervous about education," says Credico. "Now, the [DOL] is saying you can continue to offer education and actually expand it a little bit to offer more information about the plan."
This rule applies to 401(k) investment plans, but not to other employee benefits such as life insurance or healthcare insurance that lack an investment component.
If a retirement plan has more than $50 million in assets, it is business as usual for plan sponsors with one exception: ensuring there is a good governance structure in place with well-trained advisors who are dispensing proper advice. "Irrespective of this rule, HR departments or plan sponsors should always look at their governance practices and make sure [they] have good committees and documentation," Credico says.
If a retirement plan has less than $50 million in assets, investment advisors must sign a Best Interest Contract Exemption, which states they will act in the best interest of the plan and its participants and be compensated by a flat rate or percentage of assets no matter what investment is picked.
However, some believe it's too early in the process to fully interpret the 1,000-page rule and determine its impact on HR.
"Most vendors are trying to figure out what that line is between education and becoming a fiduciary," says Tim Rouse, executive director at the Spark Institute, a Simsbury, Conn.-based association for defined-contribution record keepers.
The Spark Institute recently surveyed its 56 members who are defined contribution record keepers about their reaction to the rule. Nearly 30 percent do not plan to become a fiduciary, while another 34 percent are uncertain.
Rouse encourages HR professionals to review their plan and converse with their vendor about potential, upcoming changes as a result of the regulation. Vendors that are not currently fiduciaries may need to change their direct interaction with plan participants on the web and over the phone.
"This is a major change for the industry," says Rouse, adding that the DOL will phase in the rule from April through the end of next year. "It may or may not have an impact, depending upon the level of service HR executives have come to expect from their provider."
Meanwhile, the regulation also embraces the concept of "level to level comp," providing a special exemption for investment advisors or firms that only receive a "level fee" for offering advice to plan participants who decide to roll over assets from an employer-sponsored plan, says Nevin Adams, chief of marketing and communication at the American Retirement Association in Arlington, Va.
"Level-fee fiduciaries receive the same compensation regardless of the particular investments the client makes, whether based on a fixed percentage of assets under management or a fixed dollar fee," according to the ARA's website.
Adams says this was an important change, permitting advisors to work on both sides of the rollover transaction.
"People who are changing jobs or retiring," he says, "that's a point where they're very vulnerable and being able to continue to work with an advisor who worked with them in the plan would be comforting to the employee and employer."
Meanwhile, plan sponsors could also be impacted by the regulation if the compensation of their investment advisors varies depending upon their recommendations. If so, Adams says, HR needs to ask its advisors how the rule affects them, if their fee structure will change or even if they still plan to work with plan participants.
The DOL also reminded fiduciaries that they still have an obligation to oversee and evaluate all of the services provided to the plan along with related fees and education materials.
"From an HR perspective, unless it affects the relationship you have with an advisor you're working with, [the final rule] might not affect you at all," Adams says. "This is really geared toward advisors. For HR folks, there's probably nothing you need to sweat about."
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