This article originally ran on July 28, 2015.
By Amy L. Simonson
During the first round of breakout sessions at the 2015 NTSA 403(b) Summit in Nashville, an expert panel lead a lively and engaging discussion about the Department of Labor’s (DOL) re-proposed fiduciary rule, and the potential impact on common business practices.
This article summarizes the who, what, when, where, why and how of the proposed rule.
Who Is Affected?
Currently, there are three standard of care constructs enforced by FINRA, the SEC and the DOL that regulate the conduct of registered representatives, investment advisers, and advisors acting as an ERISA fiduciary, respectively. The proposed rule broadens the definition of a fiduciary act to apply more broadly to any person earning compensation for making recommendations to IRA owners, in addition to investors holding qualified retirement plan accounts currently covered by ERISA, enacted in 1974.
What Is Changing?
The proposed rule extends ERISA-style fiduciary rules to IRAs, and in the process imposes a new set of conduct standards that would govern advice regarding IRA rollover transactions. Under the proposed rule, providing “advice” would become a fiduciary act (as defined under a new four-part test to determine fiduciary status) and would be subject to a set of prohibited transaction rules very similar to those that currently govern ERISA retirement plans.
These rules are aimed at eliminating any conflicts of interest, unless the conflict is allowed under a prohibited transaction exemption. The rule also creates a new exemption, the best interest contract exemption, which has been receiving considerable attention. Many in the industry are describing the requirements under this exemption as being both too complex and too burdensome to actually comply with in practice.
When Will the Changes Occur?
Most industry observers agree that there is some public policy pressure to have the proposed regulations implemented before the next president takes office. However, most also agree that this is an ambitious timeline.
The initial public comment period closed on July 21. A public hearing is currently expected the week of August 10, followed by an additional public comment period. Once the rule is finalized, there will be an additional window of time before the provisions become effective.
Where Do the Rules Apply?
Rollovers transactions out of an ERISA plan, and rollover transactions IN to an IRA are both covered. So even if the expanded fiduciary standards don’t apply directly to governmental 403(b)s or 457(b)s, once a conversation involves eligibility to either roll out of a plan, or remain in a plan, the line is crossed and the new rules would apply.
Why Is this a DOL Area of Focus?
This was a topic of lively debate and discussion. In part, the proposed rules are the result of regulators responding to observations of abusive sales practices. The DOL also recognizes the significant role that IRA balances are playing in retirement planning, exceeding now the balances held within retirement plans.
Proponents of the rules argue that it is an investor protection measure, while opponents argue that the increased regulations will limit access to financial advice and ultimately increase costs. This is a second effort to modernize ERISA.
How Are Firms Preparing?
Providers and firms are already reacting. Some investment providers are already considering ways to produce and market using literature that would support advisers who want to comply with the new fiduciary standard in providing advice, and another set of materials to support advisers looking to stay on the non-fiduciary side of the fence by providing general financial education, rather than advice.
Amy L. Simonson, AIF, is Vice President, Finance & Operations at Verity Asset Management | Verity Investments, Inc. and a member of the NTSA Communications Committee
Content for this article was drawn from the presentations of the following expert panelists:
Randy Aranowitz, TGPC, CLU, CLTC, Executive Vice President, Kades-Margolis Corporation
Thomas J. Granger, CPC, Assistant Vice President, Director Qualified Plans, Security Benefit
Ronald J. Triche, Esq., APM, of Counsel, Groom Law Group
Susan D. Diehl, QPA, ERPA, President, PenServ Plan Services, Inc.
Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA, or its members.