Earlier this spring, the Department of Labor (DOL) issued a much anticipated FinalRule defining who is a fiduciary of an employee benefit plan under the Employee Retirement Income Security Act of 1974 (ERISA) and updated the conflict of interest rules applicable to such a fiduciary.
The new rule is scheduled to be phased in April 10, 2017 – Jan. 1, 2018, and will expand the “investment advice fiduciary” definition under the Employee Retirement Income Security Act of 1974 (ERISA).
This sweeping legislation will automatically elevate all financial professionals who work with retirement plans or provide retirement planning advice to the level of a fiduciary, bound legally and ethically to meet the standards of that status. While the new rules are likely to have at least some impact on all financial advisors, it is expected that those who work on commission, such as brokers and insurance agents, will be impacted the most, according to an article in Investopedia.
Fiduciary is a much higher level of accountability than the suitability standard previously required of financial salespersons, such as brokers, planners and insurance agents, who work with retirement plans and accounts. “Suitability” meant that as long as an investment recommendation met a client’s defined need and objective, it was deemed appropriate.
Now, financial professionals are legally obligated to put their client’s best interests first rather than simply finding “suitable” investments. The new rule could therefore eliminate many commission structures that govern the industry.
Advisors who wish to continue working on commission will need to provide clients with a disclosure agreement, called a Best Interest Contract Exemption (BICE), in circumstances where a conflict of interest could exist (such as, the advisor receiving a higher commission or special bonus for selling a certain product). This is to guarantee that the advisor is working unconditionally in the best interest of the client. All compensation that is paid to the fiduciary must be clearly spelled out as well.
Covered retirement plans include:
- Defined-contribution plans: four types of 401(k) plans, 403(b) plans, employee stock ownership plans, Simplified Employee Pension (SEP) plans and savings incentive match plans (simple IRA)
- Defined-benefit plans: pension plans or those that promises a certain payment to the participant as defined by the plan document
- Individual Retirement Accounts (IRAs)
Although many industry groups are excited about the new plan, including the CFP Board, the Financial Planning Association (FPA), and the National Association of Personal Financial Advisors (NAPFA), critics suggest that the new Fiduciary Rule will make no difference. Those observers say consumers will still be subject to being cheated by the rogue brokers. Since complying with the new rule will require more paperwork, there is more opportunity to hide a scam and then later say the customer signed and knew what he or she was signing.
Supporters applauded the new rule, saying it should increase and streamline transparency for investors, make conversations easier for advisors entertaining changes, and most of all, prevent abuses on the part of financial advisors, such as excessive commissions and investment churning for reasons of compensation.
This information is being provided by The White Law Group, a national securities fraud, securities arbitration, and investor protection law firm with offices in Chicago, Illinois and Vero Beach, Florida. For a free consultation with a securities attorney please call 888-637-5510.
For more information on the firm, visit https://www.whitesecuritieslaw.com.
Key words: DOL fiduciary rule, FinalRule, Employee retirement rules, DOL fiduciary rule changes, securities fraud attorney, FINRA, investment advice fiduciary, Securities fraud attorney