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The DOL Fiduciary Rule Explained

Posted By: Dan Butterfield
Date: July 31, 2017


The Department of Labor (DOL) Fiduciary Rule is a new regulation expanding the definition of investment advice fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA). The law applies only to retirement account advice and investments therein, yet this represents a large segment of the financial marketplace—over $7 trillion in invested assets. Under the Rule, all financial professionals who provide retirement planning advice are elevated to the level of a fiduciary, and bound legally and ethically to meet ERISA “best interests” advice standards. The new DOL Rule not only requires all investment pros to follow a uniform fiduciary standard, it also comes with greater documentation requirements and mandates that a (BICE) contract be executed if/when certain investments are made within retirement accounts.

The first phase of the DOL fiduciary rule, which went into effect on June 9, 2017, includes compliance with investment advice standards. The second phase, which goes into effect on January 1, 2018, includes compliance with the Rule’s Best Interest Contract Exemption (BICE) requirements.

Read on to learn more about the evolution of the DOL Fiduciary Rule and lobbying efforts against the Rule.

ERISA and multiple advice standards

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law which sets minimum standards and protections for participants in qualified pension and health plans. The enactment of ERISA also gave the DOL authority to protect tax-preferred retirement savings. While ERISA provided proscriptive language around the fiduciary obligations of “plan directors” (i.e., those who have authority or control over retirement plans), the law did not mandate a uniform advice standard by those who offer investment guidance. Prior to the enactment of the DOL Fiduciary Rule, multiple standards could (did) apply to retirement planning advice and investment options. For example, broker-dealer firms employed a “suitability” standard (e.g., investments recommendations that are suitable to clients’ needs/objectives), while registered investment advisers (RIAs) were required to follow fiduciary guidelines (i.e., prudent fees and recommendations solely in best interests of clients). The existence of multiple advice standards has long been a concern to regulators because there is potential for investor confusion. This can be mitigated by clear disclosures, yet investor confusion has been and remains a primary regulatory concern.

How did the DOL Fiduciary Rule come about?

The Securities and Exchange Commission (SEC) has been studying “uniform standards” for years, but they have been slow to act. In February 2015, the US Department of Labor (DOL), motivated to protect retirement savers under ERISA, nudged their noses under the SEC’s regulatory tent and announced their intent to pass a new fiduciary rule. Subjects of the new DOL Fiduciary Rule are nearly all providers of investment advice to ERISA-covered retirement plan accounts and IRA accounts.

The DOL Fiduciary Rule ends the “multiple standards” issue and mandates that retirement account advice be provided solely under ERISA-defined fiduciary standards—in the best interests of the customer and not subject to undo conflicts of interest (e.g., inordinate fees/compensation). To ensure compliance, the Rule requires thorough documentation of all customer engagements related to retirement account investments.

When does the DOL Fiduciary Rule go into effect?

Phase one of the DOL Fiduciary Rule went into effect on June 9, 2017. It was originally slated for April 10, 2017, but it was pushed back to June. All firms and their investment professionals must now be in compliance. A temporary waiver is allowed for sale of products that would require a BICE. There is no BICE provision enforcement until January 1, 2018, for firms “working diligently and in good faith” to implement BICE.

What is BICE?

Certain product types, identified under the DOL Fiduciary Rule, have the potential to create compensation conflicts due to their higher commissions or fees (e.g., variable and indexed annuities and some fund share classes). These products cannot be sold into retirement accounts under the Rule unless done under a “Best Interest Contract Exemption” (BICE). BICE agreements are “contracts” crafted by product providers and/or firms who distribute products (e.g., Fund Distributors, Insurers, Broker-Dealers, Registered Investment Advisers, etc.), and many of these entities have expressed reluctance to author BICE contracts as they may expose them to unforeseen liabilities.

Lobbying efforts against the DOL Fiduciary Rule

As you might expect, the voluminous (1,023 pages) DOL Rule has been deemed by many “interests” in the industry to be disruptive and costly to implement. The Rule will necessitate substantive changes to a $7 trillion dollar retirement accounts “investment advice” marketplace: $4 trillion of defined-contribution plan assets (primarily 401K plans), $3 trillion of commission-based brokerage individual retirement account (IRA) assets, and an estimated $200 billion of annual IRA rollover assets. Bottom line—the DOL Rule has, at least temporarily, served to substantially disrupt the financial services industry.

The BICE provision in particular has caused much angst in the insurance industry because variable and “indexed” annuities can only be sold under BICE, and they have been very popular investments in retirement accounts. Consequently, LIMRA (counting some 850 insurance companies as clients) and the variable annuity industry teamed up with SIFMA (representing broker-dealers, banks, and asset managers) to file lawsuits and lobby against implementation of the DOL Fiduciary Rule. LIMRA's projections show that equity indexed annuity sales, which hit $60 billion in 2016, will fall to $40 billion in 2017 as a result of the DOL Rule.

The Trump administration is generally against unwarranted or burdensome regulation, and many still believe the DOL Fiduciary Rule will not survive mounting efforts to “repeal or replace” from powerful industry groups. A delay in the final appointment of a new DOL Director (Andrew Pudzer withdrew as DOL nominee; Alexander Acosta approved April 28) slowed the momentum of Rule opponents. Yet newly proposed laws may still have a chance to kill the Rule, albeit many industry veterans, who moonlight as “odd-makers,” now believe the Rule will  hold up against the onslaught.

Proposed legislation that may dismantle the DOL Fiduciary Rule

Three recent pieces of legislation, that would dismantle the DOL Rule, still have a chance to pass both Houses of Congress and be signed into law: The Financial Choice Act (passed the US House on June 8, 2017); The Affordable Retirement Advice for Savers Act (passed a US House committee in July 2017); and a new bill from Rep Ann Wagner (R-MO) that would amend the Securities Exchange Act of 1934 and replace the DOL’s fiduciary verbiage with a newly crafted “best interest” standard that is more palatable to firms used to working under “suitability” guidelines.

As of this publication date, only The Financial Choice Act has passed the House, and the Senate has yet to take the bill up for consideration. Prospects for passage appear to be slim. Too much political capital may have been expended elsewhere for the Trump administration to kill the DOL Rule, and court cases against the Rule have been resolved in favor of keeping the Rule in place.

Will the SEC take the next step and implement a broad fiduciary standard?

Firms are now rolling ahead with DOL Fiduciary Rule compliance, and not too surprisingly, the SEC has recently returned to the “uniform standards” fray in an effort to reassert their regulatory primacy. SEC Director Jay Clayton has suggested that a new broader fiduciary standards rule—applying to all types of advice/services—may be “in the works.” The SEC has a reputation for moving at a glacial pace when developing new regulations, yet they may be newly motivated to expedite matters in the wake of the DOL’s discomforting intrusion onto their turf. In the words of Director Clayton during a July 12 speech; “There is a lot of work to do, and this (uniform advice standards) issue is complex. That should not deter us, and we are moving forward.”