The Labor Department will more than likely propose fundamental changes to the fiduciary rule and its prohibited transaction exemptions, resulting in a delay of full implementation of the controversial regulation for at least one year, and perhaps longer, according to attorneys with Drinker Biddle & Reath.
Proposed revisions to the rule will be subject to public comment and other administrative requirements, as the Labor Department is committed to strictly following the letter of the law to avoid legal challenges, explained attorneys from the firm during a recent webinar.
While both a delay of the January 1, 2018 full implementation date and revisions to the rule would be welcomed by stakeholders that view the existing regulation as onerous, the attorneys cautioned that brokers and advisors to 401(k) plans have key compliance requirements under the existing transition period for the rule, which began June 9.
Specifically, brokers that have been advising 401(k) plans as non-fiduciaries are required to amend 408(b)(2) fee disclosure requirements by August 7 of this year.
Under the 408(b) (2) reg, which Labor issued in 2012 as a way to assist plan sponsors in complying with their fiduciary duties under the Employee Retirement Income Security Act, plan service providers are required to disclose their “status”—whether or not they are serving in a fiduciary capacity.
“For the most part, broker-dealers, and insurance agents and brokers, have taken the position that they were not fiduciaries and therefore did not make the fiduciary disclosure,” wrote Fred Reish, chair of the financial services ERISA team at Drinker Biddle, in a recent blog post.
But under the fiduciary rule’s impartial conduct standard, which went into effect on June 9, advisors to plans with less than $50 million in assets are required to serve as fiduciaries, and adhere to the impartial conduct standards’ requirement to give advice in a plan’s best interest.
“Under the new rules, it’s hard for an adviser to work with a plan without being a fiduciary,” wrote Reish.
The 408(b)(2) disclosure requires plan providers to communicate changes in their fees or status within 60 days of the change of services, which puts the deadline at August 7, if counted from June 9, when the impartial conduct standards took effect.
A failure to amend the proposals would make any compensation paid to brokers or advisors prohibited.
Other considerations for plan sponsors
According to Bradford Campbell, a partner with Drinker Biddle, fiduciary advisors to 401(k) plans will in many cases need to rely on the rule’s Best Interest Contract Exemption, which includes a series of extensive, new disclosure requirements for accepting variable compensation and selling proprietary mutual funds.
That places a new burden on sponsors, says Campbell. “They will have to know every conflict of interest.”
As fiduciaries, sponsors will need to know if their plan advisor is deploying the BIC Exemption, and whether the conditions of the BIC are enough to satisfy both the investment needs of plan participants, and the sponsors’ own long-standing fiduciary requirements under ERISA.
“That means there have to be some tough questions asked” on the part of sponsors, Campbell said. “This rule is a triggering event for taking another look at existing arrangements.”
The impartial conduct standards have also insisted changes to how record keepers service plans, and the scope of communications call center agents are allowed to have with plan participants.
Those changes may require new service agreements with record keepers, as well as with plan advisors. “Sponsors will want to have something on file that shows you considered” the changes, said Campbell.
Under ERISA, sponsors are required to monitor plan providers. One action attorneys say plan sponsors can take to assure they are satisfying their monitoring requirements is to issue requests for proposals with some regularity.
Under the impartial conduct standards, sponsors may want to consider if now is the time to issue an RFP, says Campbell.
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