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Regulation and Compliance > Federal Regulation > DOL

A DOL fiduciary rule compliance checklist

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Another day, another lawsuit — or that’s how it seems since the Department of Labor adopted its new fiduciary requirements for retirement plan advisors and providers.

Let’s see. In the financial sector alone, we’ve seen suits against Fidelity, American Century, Franklin Templeton, Allianz, New York Life, Cetera and others, in their role as plan sponsors or, in some cases, plan advisors. It’s a great time to be a class-action attorney.

How are you going to stay ahead of emerging legal requirements? Not only do you have to make sure that your business conforms to the new Department of Labor regulations for retirement accounts—which take effect in April 2017 — you also have to communicate to your clients that you are expertly and compliantly managing their 401(k) and other retirement plan participants’ hard-earned money.

What’s more, a lot of companies may find themselves on the 401(k) ropes, and they present an opportunity. As an advisor, you can help them sort through the regulations and what they need, and if desired, you can offload the investment decisions to a qualified provider under the 3(38) rule. That insulates both you and the plan sponsor.

The new DOL rule is about 1,000 pages long, and the government has not yet completed its guidance for how the rule is to be followed. Nevertheless, there’s a lot you can do.

Here is a six-point checklist to help you prepare.

Task #1: Know Your Responsibilities as a Fiduciary

We’ve all heard, over and over, that being a fiduciary means putting clients’ interests ahead of your own. But how? And when? Here are the details.

As fiduciaries, you are responsible for demonstrating Care, Skill, Prudence and Diligence in:

    • Selecting and maintaining investment choices,
    • Ensuring that plan fees (including investment expenses) paid from participant accountsare reasonable, and
    • Ensuring that the plan is properlyadministered in accordance withthe plan document, and with ERISA and DOL mandates.

Many of the lawsuits winding through the courts today concern the first two bullets on this list. If you are primarily picking from a menu of high-cost, proprietary products when you put together a plan, you could be vulnerable. Time to look for a firm that’s accustomed to providing fiduciary support.

Disclosure: several companies, including ours, have built their reputation on the ability to provide fiduciary services, freeing the advisor to work with the plan sponsor to outsource fiduciary management of the plan.

See also:

Final DOL fiduciary rule: A bane or blessing for advisors?

Task # 2: Find Out if Your Fees Are on the Level

One of the major changes in how advisors can practice under the new regulations is what’s called “level-fee” compensation. What does this mean? You can’t gain a different level of compensation for one product vs. another in the same category.

So if you’re selling mutual funds, for instance, you will no longer be able to accept higher payouts or trails on certain funds and not others, nor other forms of variable payments. The same goes for annuities, alternative investments, managed accounts or other products. All members of each product category must provide the same return to the advisor. This will help eliminate biases toward higher-paying products, whether they are conscious or unconscious, the DOL believes.

Several products, particularly proprietary offerings, may come into conflict with the new rule. If you have gravitated toward nonconforming products, now is the time to start researching new instruments you can comfortably recommend.

Task #3: Get Ready for the BIC(E)

Want to keep doing business as usual, whether that means collecting commissions on retirement accounts, using proprietary products, or other practices that may be problematic under the DOL rule? You’ll need to provide clients with a BICE, which stands for “Best Interest Contract Exemption.”

This document — which clients must sign upon opening an account — may well be the most confusing element of the DOL rule, and broker-dealers, custodians and compliance experts are scrambling to put legal wording in place.

The BICE contract must identify any potential conflicts the advisor faces, as well as whether he or she sells proprietary products or receives third-party payments tied to specific products. The BICE also has to affirm the client’s right to complete fee information, and provide a web address where details on the advisor’s compensation can be found.

Sound onerous? Yes, it is. And in some cases, fiduciary advisors may find they need a BICE — for example, when recommending that a client roll a 401(k) into an IRA. Every advisor should have a compliance professional on speed-dial until they are comfortable with when and how to use a BICE.

See also:

What does the DOL rule mean for your future?

Task #4: Keep Great Records

If you were wondering about what to do with your CRM beyond noting clients’ birthdays, ask yourself: why aren’t you using it to keep records of client meetings, client requests, actions you take on clients’ behalf and why you’re taking those action)?

If your CRM is modern and integrated with your other software, why not use it to create workflows so your staff can work more efficiently?

Compliance experts are pretty unanimous in recommending meticulous records for your activities once the DOL rule is in force. These should include why you are recommending various approaches, how you have examined alternatives, and why your compensation is reasonable.

Examiners are likely to request these notes in the future.

Task #5: Keep Your Compliance Attorney on Speed Dial

The complete guidance for the DOL rule is still evolving, and will continue to do so even as the rule goes into effect next spring. Nevertheless, don’t wait until the last minute to make changes in your process. There’s no better time than now to get ready for the new fiduciary environment.

Even those advisors who already consider themselves fiduciaries (yes, I’m talking to you, RIAs) may have to change some of their procedures.

Task #6: Consider Outsourcing for Simplicity

Here’s disclosure number two. At our firm, the attitude about the new DOL rule is, “come on in, the water’s fine.” Our legal experts are confident that we can provide advisors with the portfolios and tools you need to satisfy the new regulations. For example, because of the nature of the investment instruments we use, Efficient Advisors’ portfolios are already “level-fee.”

Advisors who use us or similar firms to provide an investment lineup for 401(k) plans, or to manage individual clients’ retirement portfolios, do not have to worry about running afoul of this particular element of the DOL rule.

Staying up to date with the upcoming fiduciary changes will take work, but it won’t be impossible. Start getting ready now and free yourself to focus on what matters most: engaging with clients and building your business.

See also:

NAFA: Insurers to ‘have their butts sued off’ under DOL fiduciary rule

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