Fiduciary (Retirement Accounts)
The Department of Labor (DOL) has finalized its much anticipated new fiduciary rule applicable to financial institutions and advisors working with retirement savers. The final version has changed significantly from its proposed form and reflects NAIFA’s strong advocacy and input provided to both the DOL and to Members of Congress.
The rule is over 1,000 pages long and will require a careful review and analysis by NAIFA and our counsel. Because NAIFA members are always subject to the rules and requirements of their financial institutions (broker-dealers, insurance companies, etc.), we will await further discussion of the practical applications of the rule until the financial institutions have made determinations on their specific implementation requirements.
Under the new rule, almost all advisors working with retirement savers are identified as investment advice fiduciaries, and are subject to an Impartial Conduct Standard that requires recommendations be made in the best interests of the client.
NAIFA’s Advocacy Success: NAIFA’s efforts through testimony and meetings with Congress, DOL, OMB and others–in DC and in the district offices, as well as through letters, emails, and phone calls—resulted in meaningful improvements to the final regulation and related exemptions. Notable improvements include:
- Best Interest Contract Exemption (BIC) contract provisions can be incorporated into New Account forms and signed at point-of-sale
- Broader grandfathering provisions under BIC for investments and agreements made prior to Applicability Date
- Elimination of a contract requirement for advice to ERISA plan sponsors and participants
- Advice to small employer plan sponsors and participants are covered by BIC
- Advice on rollovers and distributions are covered by BIC
- Advisors are not signatories to BIC contract, so there is no private right of action against advisors under contract law but class action claims are permitted
- Proprietary products will satisfy Best Interest standard, under certain conditions
- Welfare plans not included, unless there is an investment component
- BIC contract can waive rights to punitive damages and rights to rescind
- Elimination data retention for financial institutions
- Extension of effective date
- Removal annual disclosures and 1-,5-, and10-year projections
The Best Interest Standard: Generally, advisors who provide individualized advice, for a fee or other compensation, are investment advice fiduciaries. As such, advisors and firms need to satisfy a Prohibited Transaction Exemption (PTE) to receive commission-type compensation.
The most significant PTE is the “best interest contract” (BIC) exemption. It would allow commission type (third party) compensation arrangements only if the financial institution and the client enter into a contract that:
- Commits the firm and advisor to providing advice in the client’s best interest, charges only “reasonable” compensation, and avoids misleading statements about fees and conflicts of interest
- Adopts policies and procedures designed to ensure that advisors provide best interest advice, prohibiting financial incentives for advisors to act contrary to the client’s best interest
- Discloses conflicts of interest—this requires directing the buyer/saver to a website that discloses the firm’s compensation arrangements, and making the client/saver aware of his/her right to complete information on fees charged
The BIC contract can be entered into at the point of sale—when other account-opening documents are being signed – and advice prior to signing of the contract is subject to a best interest standard. A contract between the financial institution and the client is not required for ERISA plans and their participants, who have access to full ERISA claims and remedies. For IRA account holders and non-ERISA plans, the exemption requires a contract between the financial institution and the retirement saver.
Annuities and PTE 84-24: Advice on, and sale of variable and indexed annuities is permissible only under the authority of the BIC exemption. In proposed form, the rule would have kept indexed annuities in “the insurance PTE” (84-24). The rule contains language describing the additional complexity of variable and indexed annuities as reasons to move them out of PTE 84-24 and over to the BIC exemption, and specifically states that fees are not the only factor in making investment decisions.
Proprietary Products: The final rule specifically addresses proprietary products and how they can be recommended and sold under the authority of the BIC PTE. Proprietary product rules require that firms determine that the limitations (on advice restricted to only proprietary product choices) are not so severe that the advisor will generally be unable to satisfy the exemption’s best interest standard and other requirements. We are continuing to review other conditions that must be met in order to satisfy the Best Interest Standard, and whether those conditions are workable.
Level Fee Exemption: Firms and advisors working on a level fee can rely upon the level fee exemption. Firms must keep records on certain specific recommendations, including a recommendation to roll over assets from an employer plan to an IRA, and show that the recommendation and fee agreement are in the customer’s best interest. Level fee fiduciaries are defined as those who receive the same compensation, regardless of the particular investments the client makes (e.g., they may be compensated based on a fixed percentage of assets under management or a fixed dollar fee) and are not compensated based on commissions or transaction fees.
Effective Date: June, 2016
Applicability Date: April 10, 2017 (for the new definition of investment advice fiduciary, including acknowledgment and recommendations in the best interest of the client)
Applicability Date: January 1, 2018 (for full compliance with BIC and other exemptions)
Next Steps: Most of the final rule’s requirements fall on financial-services firms rather than on individual advisors. NAIFA members will need to adjust to their broker-dealers’ and investment advisor firms’ implementation requirements. Also watch for the announcement of our Fiduciary Best Practices Workshop – A new four-hour NAIFA Skill Builders Series workshop developed by subject matter expert Don Trone, GFS®, on fiduciary best practices, scheduled to be released in June 2016. This new NAIFA Skill Builders Series Workshop is designed to be delivered through the state and local associations. Additional details will be announced soon. For more information, contact Diane Powers, Vice President, Professional Development and Education.
- April 13, 2016: NAIFA Webinar – The DOL Fiduciary Rule: What it Means for NAIFA Members (Members Only)
- April 6, 2016: DOL Releases final rule
- March 11, 2016: NAIFA Staff meets with OMB
- February 10, 2016: Senate introduces three bills mirroring House legislative effort
- January 28, 2016: DOL submits final rule to OMB for review
- January 5, 2016: NAIFA President Jules Gaudreau and Government Relations Director Judi Carsrud participate in InsuranceNewsNet webinar: Your DOL Questions Answered!
- December 18, 2015: Bipartisan Legislative Alternative to DOL Proposal Introduced
- December 15, 2015: NAIFA President Jules Gaudreau and Government Relations Director Judi Carsrud participate in InsuranceNewsNet webinar: DOL Fiduciary Rule – Advisor Update
- December 2, 2015: NAIFA President Jules Gaudreau testifies before House Subcommittee
- November 17, 2015: NAIFA Co-Sponsors “Will Savers Benefit?” Fly-In with U.S. Chamber of Commerce
- November 6, 2015: Morningstar Outlines Costs of DOL Proposal
- November 5, 2015: Reps. Roskam, Neal, Roe, Larson and Lujan Grisham introduce Principles to ensure best interests
- November 4, 2015: Secure Family Coalition runs ad in Politico
- October 30, 2015: Rep. Jared Polis sends letter to Secretary Perez requesting additional comment period
- October 29, 2015: NAIFA President-Elect Paul Dougherty participates in House staff briefing
- October 27, 2015: Wagner bill to stop DOL action on fiduciary passes House 245-186
- October 13, 2015: Judi Carsrud gives DOL Update on Real Wealth Marketing’s Power Session LIVE
- September 30, 2015: NAIFA member Ken Specht testifies at House Ways and Means and Oversight Subcommittee hearing
- September 25, 2015: NAIFA Secretary Paul Dougherty participates in Senate Financial Planning and Life Insurance Caucus briefing
- September 24, 2015: NAIFA Submits Additional Comments on DOL’s Proposed Fiduciary Rule
- September 24, 2015: Rep. Gwen Moore sends comment letter of concern to Secretary Perez with 96 Dem signatures
- September 23, 2015: NAIAF hosts Webinar – DOL Proposal: What You Need to Know Now (download PPT)
- September 21, 2015: Rep. Lynn Jenkins sends comment letter of concern to Secretary Perez with 81 Republican signatures
- September 18, 2015: NAIFA Secretary Paul Dougherty participates in House Financial Planning and Life Insurance Caucus briefing
- September 16, 2015: NAIFA President-Elect Jules Gaudreau presents DOL concerns at CEFLI annual conference
- September 10, 2015: NAIFA President Juli McNeely Testifies before House Subcommittees
- August 11, 2015: NAIFA President Juli McNeely testifies at DOL
- July 27, 2015: GovUpdate (Members Only)
- July 21, 2015: Nearly 6,000 NAIFA members write to Department of Labor
- July 21, 2015: NAIFA Submits Comments on DOL’s Proposed Fiduciary Rule
- July 15, 2015: GovTalk (Members Only)
- July 6, 2015: GovAlert Take Action Now on the Unworkable DOL Fiduciary Rule
- July 1, 2015: NAIFA Staff meets with FINRA on DOL
- May 20, 2015: NAIFA member constituents meet with over 90% of Congress
- May 20, 2015: NAIFA Leaders meet with DOL
- May 11, 2015: DOL Proposal on NAIFA Conference Agenda
- May 8, 2015: Why the Proposal Would have a Huge Impact on Advisors and Investors
- May 7, 2015: NAIFA Applauds Congress’s Support to Extend Comment Period
- May 5, 2015: NAIFA Fact Sheet
- May 4, 2015: NAIFA Leaders meet with White House Officials on DOL
- April 23, 2015: NAIFA Requests More Time to Study DOL Fiduciary Proposal
- April 17, 2015: GovTalk (Members Only)
- April 15, 2015: FAQ: The Department of Labor Fiduciary Proposal
- April 14, 2015: NAIFA Statement on DOL Proposed Regulation
- April 14, 2015: NAIFA GovUpdate (Members Only)
- February 25, 2015: NAIFA GovTalk (Members Only)
- February 23, 2015: NAIFA’s Formal Statement
- February 23, 2015: President Obama’s Announcement