DOL Fiduciary Rule 101

Did you know that under existing laws, the person or organization who manages your company’s 401(k) is not legally obligated to provide advice that is in the best interest of the investor? If that seems crazy to you, then it perhaps will come as no surprise that this is about to be changed with the new U.S. Department of Labor (DOL) fiduciary rule. Let’s take a look at more details.


What is the DOL Fiduciary Rule?

This is a large piece of legislation with a lot of detail, but there are a couple key points:

  1. Fiduciaries must act in the client’s best interest. This DOL rule will make it so that anyone who acts as an advisor for a retirement account like a 401(k) must provide advice that is in the best interest of those investing (their clients) and to put the interests of their clients above their own. Before the implementation of this rule, the only standard was that the advisor must give advice that is “suitable” for the client’s goals, and it didn’t matter if that individual gave advice based on getting payment for making certain recommendations, even if there were better options for the client, such as similar investments with lower fees.
  2. Conflicts of interest are not allowed, and fees and commissions must be disclosed. The new rule also says that all fees and commissions must be disclosed to clients in dollar form and that any payment to the advisor that presents a conflict of interest is not allowed. The only way a broker or advisor will be able to keep such a payment is if his or her clients sign an exemption agreeing that the commission is known and that the advisor will still act in the client’s best interest. (It is estimated that these types of arrangements where advisors push investments based on commissions they’ve been promised—which is currently legal—cost retirement investors billions in lost income and excess fees every year, which is one of the reasons for the rule change.)

When Does It Go into Effect?

The rule was issued in April 2016, and its provisions will start to be phased in as of April 10, 2017. Some provisions will take effect as late as January 1, 2018.

Who Is Considered a ‘Fiduciary’ Under the New Regulations?

Under the new definitions, anyone who works with retirement planning accounts or who provides retirement planning advice for such accounts will be considered a fiduciary and will be subject to the stricter standards. It’s important to note that these stricter standards are not being imposed on those who work with other investments that are not “official” retirement accounts, even if the person making the investment intends to use the funds for retirement savings. Only those working with accounts that are designated at the government level as retirement accounts, like 401(k)s, individual retirement accounts (IRAs), etc., will count in this regard.

This is a change from before when only those who charged a fee were considered to be fiduciaries for retirement accounts. The rule will now include more than just those who charge fees.

What Is Not Covered as ‘Investment Advice’?

It’s important to note that not all conversations with a financial advisor will be considered to be “investment advice.” An advisor will still be able to send general communications and to provide educational information without it being considered “advice” for the purposes of these updated regulations.

The new rule also does not include general communications to employees about plan offerings, such as the type of communication that would be commonly sent by a Human Resources department to simply relay the available options. This type of communication is not considered advice.

What Does This Mean for Employers?

For employers who offer a retirement plan benefit, it means that anyone who is considered a fiduciary for their plan under the new rules will be subject to these new regulations. This may mean that any advisor working with employees utilizing the plan may end up modifying his or her advice to now be in the best interest of the client (you and your employees) if it was not in the past.

It may also mean that some brokers or advisors change their fee structures in the future, so be aware that this change may be coming. In some cases, it may even mean that some employers without enough retirement assets may no longer be served by larger firms if they change how clients are charged and which clients to pursue.