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Guide to the Proposed DOL Fiduciary Rule


Retirement savers and participants in 401(k) plans may soon face a new Department of Labor (DOL) policy, presenting them with either more investment options or just unnecessary costs, depending on one’s perspective. In December 2020 the DOL issued its final rule regarding an exemption to the Employee Retirement Income Security Act (ERISA) that would let financial fiduciaries be paid for advice on rollovers by third parties so long as they act in savers’ best interest. However, before it takes effect the so-called “fiduciary prohibited transaction exemption” is likely to be toughened by the incoming Biden administration.

Historical Background

Effective June 2020, brokerage firms and financial advisors had to abide by the Securities and Exchange Commission’s (SEC) consumer-friendly Regulation Best Interest rule (RBI). That requires brokerage firms and financial advisors to disclose potential conflicts of interest when they give consumers financial advice. Essentially, the RBI raised the bar on the existing “suitability” standard. That standard meant that investments or products that brokers recommended to their clients had to be generally “suitable” rather than in a client’s best interests. In other words, a recommended investment did not have to be the best or most cost-effective choice. Now, broker-dealers are required to act in the best interest of their clients. They are prohibited from putting their financial interests ahead of the interests of a customer when making recommendations.

The DOL’s newly released “fiduciary prohibited transaction exemption” aims to conform regulations about advice to investment retirement accounts and rollover recommendations to the SEC’s Regulation Best Interest.

The Exemption

DOL Fiduciary Rule

The proposed exemption to prohibited transactions involving investment advice fiduciaries would let fiduciaries get paid for advice, something that would otherwise be deemed a conflict of interest according to ERISA because by definition fiduciaries are obliged to pursue their clients’ best interests.

The exemption would be conditioned on the financial professional meeting three requirements. Known collectively as the impartial conduct standard, they are reasonable compensation, not making materially misleading statements and meeting a best interest standard.

That last item is important because being a fiduciary obliges professionals to act in the best interest of their clients, and it aligns with a broader investment advice regulation that the Securities and Exchange Commission (SEC) issued in June 2020. Acting in the best interest of a client means that when a client is considering similar securities or assets, though with different fees for the advisor, the advisor must put his client’s interest before his own and thus recommend either the less expensive option or be able to justify recommending a more expensive option as being in the client’s best interest.

The advice envisioned in the DOL’s new rule includes, but is not limited to, advice about individual retirement account (IRA) rollovers. Compensation for this kind of advice could include 12b-1 fees, trailing commissions, sales loads or revenue-sharing payments from investment providers or other third parties like mutual funds or insurance companies that sell annuities.

The Five-Part Test

Secondly, the DOL’s newly released exemption aims to reinstate a five-part test for determining when someone is a fiduciary. The five elements of the test for being a fiduciary entail:

  • Providing investment advice regarding the value of securities or other assets or makes recommendations such as investing in other securities
  • Providing advice regularly to a client
  • Pursuing a mutual agreement or understanding with the plan
  • The investment advice serves as a primary foundation for investment decisions regarding the plan
  • The advice is based on the unique needs of the plan or IRA.

A financial institution or investment professional that meets this five-part test, and receives a fee or other compensation, direct or indirect, is an investment advice fiduciary under ERISA.

Third Feature of the Proposal

Finally, the proposal clarifies conditions in which professional advice to roll over retirement savings from an employment-based plan like a 401(k) to an IRA would trigger fiduciary status.

The proposal by the DOL, which it says aims improve investment advice for workers and retirees, would apply to registered investment advisers, broker-dealers, banks, insurance companies and their employees, agents and representatives.

Possible Pros and Cons

Advocates of the proposal say it would:

  • Let brokers offer a wider array of products than they currently may
  • Apply the new standard to a broad spectrum of financial professionals (RIA, broker-dealer, insurers, banks)
  • Bring DOL regulations into alignment with the SEC’s Regulation Best Interest

Critics say the proposal would:

  • Let mutual funds, for example, compensate advisors for affirmative recommendations based on the SEC’s Regulation Best Interest, an obvious case of “conflicted compensation
  • Allow financial advisors to dodge being categorized as fiduciaries according to the revived five-part test by simply saying their rollover advice was not “ongoing” but rather a one-off affair
  • Leave unclear how the SEC’s newly adopted Regulation Best Interest will be interpreted or applied by the DOL

How to Find a Financial Fiduciary

There are several resources available that can help you know if an advisor is a fiduciary. The National Association of Personal Financial Advisors (NAPFA) has an online search tool that makes it easy to find certified financial planners in your area. Every advisor in that system operates on a fee-only basis and promises to act as a fiduciary.

Garrett Planning Network is another planner organization of fiduciary financial planners who charge an hourly rate. Additionally, the Certified Financial Planners Board has an advisor search tool. You can use it to look up a particular planner and see their experience and history.

Once you identify potential advisors, here are the sorts of questions you should ask advisors to ensure that they suit your needs and have minimal conflicts of interest:

  • How do you earn money?
  • What certifications and licenses do you hold?
  • What services do you offer? Who is your typical client?
  • How often do you typically communicate with clients?
  • Can you provide a written guarantee of your fiduciary duty?

You should also request a copy of a financial advisor’s Form ADV and Form CRS, which is paperwork the SEC requires advisory firms to file. This will provide information about an advisor’s business, pay structure, educational background, potential conflicts of interest and disciplinary history. That information is also available online through the SEC’s Investment Advisor Public Disclosure tool. You should also request a performance record and list of client references to contact.

Bottom Line

DOL Fiduciary Rule

The DOL was expected to send its rule to the Federal Register before the end of 2020. Since the exemption won’t take effect until 60 days after submission to the Federal Register the Biden administration is expected to revise the DOL exemption to make it more consumer friendly.

However, no matter what happens, retirement savers should be very clear about whether the advisors they go to for rollover advice is genuinely pursing their best interest, and not disguising a sales pitch as financial advice just to boost the fees they collect. Fiduciaries must always act in their clients’ best interest – and if they don’t, you have legal options to pursue.

Tips for Finding a Financial Advisor

  • Consider talking to a financial advisor about their fiduciary duty before signing on with them as a client. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Talk to at least three candidates before settling on one. That way, you’ll have enough context about fees, services and investing strategies to choose with confidence.

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