The Department of Labor’s long-awaited final fiduciary rule “ensures that putting clients first is no longer a marketing slogan, it’s the law,” Labor Secretary Thomas Perez told reporters on an early April call to announce completion of DOL’s rule to amend the definition of fiduciary on retirement advice.
“With the finalization of this rule, we are putting in place a fundamental protection into the American retirement landscape,” Perez said on April 5, the day before the rule was released. “A consumer’s best interest must now come before an advisor’s financial interest. This is a huge win for the middle class.”
After nearly six years of reworking the rule based on extensive and “invaluable” public feedback from consumer groups and stakeholders, Perez told reporters that DOL has “streamlined” and clarified its conflict of interest rule — including the controversial Best Interest Contract Exemption (BICE), the disclosure provisions, proprietary products and treatment of products like annuities, as well as commissions.
“We listened, we learned, we adjusted,” he said, “and you’ll find that in the final rule.”
As part of the overhaul, DOL has also lengthened the compliance timeline under the rule to one year from the original eight months, Perez said, and “phased in the implementation so firms will have until Jan. 1, 2018,” to come into full compliance.
The final rule and exemptions adopt a “phased” implementation approach. One year after the rule’s publication, in April 2017, the “broader definition of fiduciary will take effect, but to take advantage of the BIC exemption, firms will only be required to comply with more limited conditions, including acknowledging their fiduciary status, adhering to the best interest standard and making basic disclosures of conflicts of interest,” DOL stated in a fact sheet detailing some of the final rule’s changes.
The other requirements of the exemption will only go into full effect on Jan. 1, 2018.
Now that the rule is completed, DOL’s focus is “shifting to working collaboratively with all stakeholders to ensure compliance,” Perez said, adding that over the next 18 months, DOL “will be fanning out to address questions, concerns and help facilitate compliance.”
Perez, along with White House National Economic Council Director Jeffrey Zients, Sen. Elizabeth Warren, D-Mass., and other lawmakers publicly announced the final rule at an event at the Center for American Progress in Washington on April 6. The rule appeared on public inspection at the Federal Register later that day.
Zients noted on the media call that a little over a year ago, President Barack Obama “called for action to crack down on conflicts of interest in retirement advice, which costs American families billions of dollars every year.” With the release, he continued, “we’ve reached a major milestone — the Department of Labor has finalized crucial protections for middle class Americans’ retirement savings.”
Zients noted that DOL’s final rule “incorporates feedback, helps to streamline and clarify the proposal, to minimize the compliance burden and ensure continued access to good advice, while at the same time maintaining an enforceable best interest standard.”
These new rules, he continued, “will level the playing field so that retirement advisors will compete based on the quality of advice that they give.”
He acknowledged, however, that “powerful interests” remain aligned against DOL, “insisting that the only good rule is no rule at all.”
Zients repeated a message that the president delivered last year: “If your business model rests on bilking hardworking Americans out of their retirement money, then you shouldn’t be in business.”
The president, he said, “will continue to fight to protect this new rule.”
Under the final rule, any individual receiving compensation for making investment recommendations that are individualized or specifically directed to a particular plan sponsor running a retirement plan (e.g., an employer with a retirement plan), plan participant or IRA owner for consideration in making a retirement investment decision is a fiduciary.
The rule also clarifies what “does and does not constitute fiduciary advice” and includes examples of communication that would not rise to the level of a recommendation and thus would not be considered advice. Specifically, it states that “education is not included in the definition of retirement investment advice so advisors and plan sponsors can continue to provide general education on retirement saving without triggering fiduciary duties.”
Further, the final rule defines a variety of investment education activities that fall short of fiduciary conduct, and makes clear that advisors do not act as fiduciaries merely by recommending that a customer hire them to render advisory or asset management services.
Perez explained some changes made to the Best Interest Contract Exemption.
“We were asked to adjust the mechanics of the contract,” Perez said. “Companies said that they would have to put a contract in front of potential customers the minute they walked in the door or the minute they got on the phone, so we addressed that.”
”Now,” he continued, “the contract can be completed at the same time as the other paperwork you fill out when you open an account. So for instance, if you go to four companies to shop around on how to invest your $100,000 that you’ve saved and you choose the second company that you met with, then when you execute the paperwork to establish that relationship, it’s then and only then that you execute the contract, and that contract can be as simple as a sheet of paper or another paragraph attached to one of the other documents that you are signing.”
He added: “You don’t have to do a thing with any of the other companies that you dealt with.”
The final rule also voids a list of approved assets eligible under the BIC exemption. “We got a lot of feedback that folks didn’t like the list of assets, so in the final rule that list is gone,” Perez said.
As for presenting the BICE to existing clients, “firms can now send a simple email or letter — which does not require the entry of a contract — […] to address the issue of the existing customers,” Perez stated.
Fred Reish, a partner in Drinker Biddle & Reath’s employee benefits and executive compensation practice group, said the “biggest surprise” is the extension of the compliance requirements. “The final rules allow a year before compliance is required. Even then, compliance with the [BICE] is simplified until the full requirements take effect on Jan. 1, 2018, over a year and a half from now.”
Also, the compliance requirements for BICE have been “greatly simplified” under the final rule, Reish added. “That includes the timing of the execution of the contract — point of sale — and the elimination of the most burdensome financial disclosures.”
Perez stated on the call that DOL “eliminated the one-, five- and 10-year projections of the point of sale disclosure as well as the annual disclosure, and streamlined other disclosures.”
That being said, “the basic structure of the regulatory package has not changed,” Reish added. “The definition of fiduciary is still encompassing and the exemptions are still needed. Those changes are nothing short of revolutionary for advice to IRAs.”
Rule Will ‘Survive Lawsuits’
DOL is confident that the rule will survive legal challenges, the two top architects of the rulemaking said in early April.