DOL Fiduciary Rule Applicable June 9: What Does It Mean to You?

UPDATE: The DOL's Fiduciary Rule has been vacated.

I’ve written before about the Department of Labor fiduciary rule and its potential impact on the retirement industry. Now, with the applicability date of June 9th, 2017, I think it’s a good time to take a closer look at the fiduciary rule and its implications for employers managing 401(k) plans. What is this rule all about? How can we expect retirement service providers to react once it goes into effect? And perhaps most importantly, what questions can you ask your provider to better understand how the rule will impact you?

What Does the DOL Fiduciary Rule Mean?

If you manage a retirement plan for your company, you may already have heard some buzz about this new rule because of industry press coverage. For those who have not heard about it, the Department of Labor has passed a new rule, changing who is considered a “fiduciary” under ERISA, the Employee Retirement Income Security Act of 1974. Starting June 9, anyone who gives an investment recommendation is a fiduciary and has a legal responsibility to put first the best interests of employees participating in the plan. ERISA places a high standard on fiduciaries, and does so in order to ensure that anyone influencing decisions involving employees’ retirement savings does so for the employees’ benefit, avoiding conflicts of interests that may give them a reason (say, personal financial gain) to put their own interests ahead of the employees’.

Previously, third party financial advisors were only fiduciaries if they had an ongoing agreement with the plan or the participating employees. Now, starting June 9th, the new rule extends fiduciary responsibility to any financial advisor giving investment advice or recommendations to a retirement plan, to the plan’s sponsors (meaning the employer), to the plan’s participants (meaning employees or anyone else investing in the plan), and to the owners of IRAs. There are some provisions—like portions of the BIC exemption—that will be phased in over time, so the rule will take full effect in the beginning of 2018.


“BIC Exemption” Definition

In this context, the acronym “BIC” refers to a “Best Interest Contract.” When financial advisors enter into a BIC with a client, they agree to disclose conflicts of interest they have in offering financial advice, and to also act in the best interests of the client despite those conflicts of interest. The DOL fiduciary rule forbids advisers to earn certain types of commissions on certain types of financial products, but a separate document published by the DOL, a “prohibited transaction exemption,” allows firms using BICs to exempt certain transactions from that rule. This allows them to continue earning variable commissions as long as the advice they are giving in selling those financial products is not discretionary. Download our complete whitepaper on the DOL fiduciary rule for more information about the BIC Exemption.

How Might the Retirement Industry React?

This rule has large implications because, as comedian and political commentator John Oliver pointed out last year, many financial advisors have not in the past had any legal responsibility to offer unbiased, objective investment advice to their clients. Since the rule passed, many firms in the retirement industry have been working to adapt their business model to adjust for these new requirements, especially around the concept of eliminating their conflicts of interest.

Only time will tell exactly how the industry will change once the rule takes effect, but I believe there are five ways we can anticipate financial advisors to react:

  • Some 401(k) providers will leave the business. The vast majority of the retirement industry is made up of local and regional brokers who service less than 10 plans. Their options are limited for developing a new approach to profitably offer 401(k) services while meeting the requirements of the ruling. Many in such circumstances will sell their portfolios or ‘get out of the 401(k) business’ all together.
  • Personal Financial Advisors will stop offering 401(k) as convenience to their clients. To date, it has been common in the industry for financial advisors to offer 401(k) plans as “loss-leaders,” products that themselves don’t turn a profit, but serve as a vehicle to cross-sell other financial products like loans to 401(k) client employers and employees alike. Some of these financial advisors may opt to stop selling these products to focus on 401(k) service.
  • Firms will restrict the investments available within their plans. Often, firms servicing retirement plans have offered their own mutual funds as an option for their 401(k) clients to include in their plans. Many firms have also set up relationships with fund managers to receive a “kickback” or revenue sharing from selling specific funds. These firms will have to remove these kinds of investment options from the retirement plans they manage in order to avoid a conflict of interest under their new fiduciary obligations.
  • Advisers will raise their fees. Others, instead of leaving the business, will simply charge higher fees in order to take on the fiduciary risk and remain profitable.
  • Some won’t change anything at all. Some firms, like Fisher Investments 401(k), already act as fiduciaries. We’ve built our business on the philosophy that 401(k) plan participants should be protected from conflicts of interest (particularly fee-based conflicts).

What Should You Do as a Result of the New Rule?

The new rule was established to protect participants in a 401(k) plan from conflicts of interest. If you’re concerned about how the rule will impact your retirement service provider and, by extension, your plan, there are a few questions you can ask and steps you can take to make sure you and your employees get the protection intended by the Department of Labor.

  1. Ask: Are you now a fiduciary for my plan? If your financial advisor is a fiduciary in compliance with the new rule, you may also ask if they have already been a fiduciary, or if this is a new role for them. If so, ask if your fees will be increasing as a result. If your financial advisor indicates that they are not a fiduciary, I recommend that you find a new one.
  2. Ask: Do you receive compensation from any of the mutual funds currently available in my 401(k) plan? As I mentioned above, it’s common for 401(k) service providers to receive an incentive for offering certain mutual funds to their clients. This is a common source of conflicts of interest. If your financial advisor indicates that they do not receive a kickback or revenue share, then you know this is not a conflict. If they say that they do, you have two options: First, you can ask them how, as a fiduciary, they are addressing this potential conflict of interest. Second, you can ask them to update their fee arrangements on your plan to remove variable compensation (like revenue sharing for offering certain mutual funds) or any other conflicts of interest. If you don’t like their response to either of those questions, it may be time to find a new financial advisor.
  3. Ask: Do you have any other conflicts of interest? Every financial advisor should have a document that explains their conflicts of interest. Registered Investment Advisers are required to disclose their conflicts of interest in Form ADV Part 2A. If the person you’re asking says that they don’t have any conflicts of interest, be sure to get that in writing.

The new DOL fiduciary rule might mean a lot of change for your retirement plan, or it might mean business as usual. In either case, as a fiduciary yourself, taking the time to ask these questions and understand the rule’s impact on your plan can put you in a position to confidently make decisions that are in the best interests of your employees. That, in the end, is what the new rule is all about.

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