One ERISA lawyer perhaps said it best after digesting the Department of Labor’s recently released 700-page fiduciary redraft: “There is so much to say. I don’t know where to begin.”

While industry officials see improvements in the DOL’s long-anticipated, controversial redraft of its rule to amend the definition of fiduciary under the Employee Retirement Income Security Act, they see new problems, as well as retained snafus that appeared in the original 2010 version.

Labor Secretary Tom Perez said in releasing the proposed rule in mid-April that it ensures that those who are providing clients with “retirement investment advice are working in your best interest,” and that the plan also provides for “streamlined, flexible ways to comply with that goal” by allowing advisors to enter into a “new and enforceable best interest contract before they can receive any payments that might bias their advice.”

The Best Interest Contract Exemption (BICE), Perez said, “is a straightforward agreement” that ensures clients know they’ll get advice on investing their retirement savings that puts “their interests first.”

The new best interest contract “creates a guardrail” requiring those giving advice to put their “clients’ best interest first. For many broker-dealers, they don’t have that guard rail” in place now, Perez said.

Fred Reish, partner and chairman of the financial services ERISA team at Drinker Biddle & Reath in Los Angeles, pointed out that the DOL’s revised plan can impact advisors when giving retirement advice to plans, participants and IRA owners, as well as advice on rollovers.

As Reish explained, (and he isn’t known as an ERISA guru for nothing), DOL’s proposal would require almost all advisors to plans and IRAs to be fiduciaries. “Generally, advisors can only charge a ‘level’ fee for their investment advice. BICE is an exception to that rule (or as ERISA and the Internal Revenue Code say, an exemption).”

The exemption covers conflicted situations where, for example, the advisor can make more money by recommending certain investments over others or by recommending investments managed by an affiliate (which would mean more money for the corporate family because of the management fees), Reish said.

To take advantage of BICE, “the advisor and his entity (e.g., the financial advisor and his broker-dealer) would need to enter into a contract with the investor. For example, the investor could be an IRA owner or a 401(k) participant,” Reish said.

DOL states in its proposal that the BICE exemption promotes “the provision of investment advice to retail investors that is in their best interest and untainted by conflicts of interest.” The exemption “would permit receipt by advisors and financial institutions of otherwise prohibited compensation commonly received in the retail market, such as commissions, 12b-1 fees and revenue sharing payments, subject to conditions designed specifically to protect the interests of the investors.”

Impact on RIAs, broker-dealers 

For the most part, Reish said that RIAs who are already following the law will not be impacted by the proposed changes except when dealing with rollovers. If RIAs do provide advice or make recommendations “on rollovers, that is, to take plan distributions, and if their fees are higher in the IRA, that will be viewed as a prohibited transaction conflict of interest.” As a result, they will need to comply with BICE.

See also: Top 10 rollover mistakes

For smaller, independent broker-dealers, Reish said that the disclosure requirements and other conditions of BICE will prove “so burdensome that they may decide to allow their advisors to be fiduciaries and then levelize fees for services to plans, participants and IRAs.”

For larger broker-dealers with affiliated mutual fund managers or insurance companies, they will also likely be required to comply with BICE, Reish said, which will be “burdensome and expensive” if BICE becomes finalized as currently drafted. The most difficult aspect of BICE, Reish added, is “the financial disclosures.”

Kent Mason, a partner with Davis & Harman in Washington, said that while the redraft’s framework “could work conceptually” in its current form, “it would have the same effects as the original 2010 proposal — cutting off the option for low- and middle-income individuals and small businesses to receive” investment assistance.

DOL’s exemption approach, Mason argued, “does not work, thus effectively creating the same result as 2010.” Under the original proposal, the problem was that almost all financial professionals providing investment assistance “would become fiduciaries and thus subject to the ‘prohibited transaction’ rules.”

The redraft’s prohibited transaction rules “would make the means by which small accounts and small businesses generally receive personalized investment assistance illegal,” Mason said. “The reproposal attempts to address this issue by including an exemption from the prohibited transaction rules that could, if it worked correctly, preserve access to investment assistance. But the exemption does not work: It is extremely narrow, is not principle-based and includes such impractical conditions that it is unusable.”

‘Adding cost and complexity’ 

Mason said financial institutions “would be prohibited from providing any specific assistance to individuals seeking help with the rollover and distribution process, which is not covered by the exemption.”

Brian Graff, president and CEO of the American Retirement Association, noted that while the revamped plan “appears” to preserve 401(k) participants’ ability to work with advisors’ of their choice on rollovers, “the new compliance regimen looks to be significant, adding cost and complexity to the process.”

Among other things, Graff said, “this includes written contracts with multiple signatures, as well as initial and annual disclosures.”

“Requiring so many layers of duplicative disclosures could be counter-productive — and cost-prohibitive to offering this critical level of support to 401(k) participants at a crucial point in their retirement planning,” said Graff, who’s also the executive director of the National Association of Plan Advisors.

Labor Secretary Perez told reporters on a mid-April call that the proposal “does not end or bar commissions or other payments,” and it “does not apply to appraisals for valuations of stocks.” Also, “it would not apply to brokers who just take direct orders from customers and would not limit access to financial education.” Call centers, he said, could continue to provide financial education.

But Mason warned that assistance to small businesses would also be illegal because it is not covered by the exemption. Financial institutions selling retirement plans “would be prohibited from providing any material assistance to small businesses in selecting investment options to offer their employees, a critical element in setting up a plan, but which is also not covered by the exemption.”

Also, the redraft’s proposed exemption that’s intended to permit the provision of investment assistance to individuals with smaller accounts “is not usable,” Mason argued. While he said that a “principle-based exemption could work,” he argued that the proposed exemption “is not principle-based. Instead, the exemption requires the production of an unprecedented amount of very specific data.”

THE WHITE HOUSE WEIGHS IN

Mason cited the following example. Under the reproposal, financial institutions are required to disclose — and update at least quarterly — all direct and indirect compensation received with respect to all assets of all retirement customers of the financial institution and all affiliates for the past 365 days. Institutions would have to provide the same information with respect to all assets that a retirement customer could possibly purchase (other than certain assets not commonly purchased).

On the mid-April call announcing release of the redraft, Jeffrey Zientz, director of the National Economic Council and assistant to the president for Economic Policy, said that the retirement advice Americans are getting “isn’t always in their best interest.”

Zientz added that while the administration expects “plenty of good faith input from all manner of commenters,” he also threw down the gauntlet by saying that “for some special interests and their allies in Congress, the only good rule would be no rule at all. We want to make very clear that inaction is not an acceptable outcome of this process.”

Perez noted that DOL would schedule a public hearing “shortly after” the comment period closed, and that the public record will be reopened for comment after the public hearing is held. The comment period, which began on April 20, will run until July 6, the first business day after the end of the 75-day period on July 4. But industry trade groups have asked DOL to extend the comment period by another 45 days.

Only after reviewing all the comments will the administration decide what to include in a final rule, DOL said, and even once the DOL ultimately issues a final rule, it will not go into effect immediately.

Declining to comment on when a final rule may be issued, Perez said, “We’re going to conduct a methodical review; I’m very confident that we will get some very helpful insights in this [comment] process.”