Blog

Department of Labor Expected to Issue Revised Conflict of Interest Rule in March 2016

Rules May Lead to the Emergence of New Entities


Next month, the DOL is widely expected to issue the revised copy of its proposed rule seeking to redefine the term "fiduciary" with a focus on conflicts of interest. The rule aims to eliminate conflicts of interest and to establish a fiduciary standard with participants’ best interests at heart. The initial proposal was revolutionary in a number of ways. In addition to attempting to establish an overall fiduciary standard, the bill also proposed language that may require the plan advisor and the service provider to act as fiduciaries if investments were mentioned. This in turn may impact employee education and communication.

The main objections are that small employers, who typically buy retirement plans through broker/dealers, will have limited choices because the cost of compliance with the rules (best interest contract) will reduce the number of advisors who are able to offer these services. Those who are still able to offer retirement plan guidance will likely reduce the amount of investment education and communication for participants.

Not all the news is negative. The rule presents an opportunity for registered investment advisors and investment advisor representatives who are entirely dedicated to offering retirement plans. The challenge for them may be in the level of fiduciary responsibility that comes from gathering assets from outside plans. Other challenges include:

  • Participant Education – if investment information is referenced the advisor or provider could be considered the fiduciary
  • Advice – any investment solutions offered specifically for use in retirement plans may be considered advice which would be subject to different guidelines
  • Product information – Product information or allocation information may be considered advice which would only be available from the fiduciary

All of these issues may result in the emergence of entities – spun off by service providers - entirely dedicated to communication, education, and advice of retirement plan participants which could be compensated with a flat fee-for-service arrangement.

In the end this may drive further consolidation of retirement plan recordkeepers and undoubtedly reduce coverage. Two bills were introduced in the house in December that would establish a “best interest” standard for advice given to qualified plans and IRAs. They would block the DOL from amending the existing definition of fiduciary while adopting many of the proposed DOL changes, but adoption by both chambers is unlikely.

We will continue to keep you apprised of the latest developments and we will dedicate time at the annual meeting in June to discuss the status. In the meantime, be ready to flex your business model!!

Viewpoints

Comments

Case Studies

Advisor Search

View Our Annual Reports