- Fiduciary Rule Round Up
- Who is subject to the new rule?
- Does the new rule only apply to investments in our retirement plan?
- If this is about protection, what’s the downside?
- What Plan Sponsors Need to Know
- Technically Speaking
- Don’t Get Ahead of Yourself Quite Yet…
- Houston, We Have a Problem…
There has been much upheaval in the retirement world as of late
and it centers around the new fiduciary rule. The New
Fiduciary Rule means that many investment professionals that weren’t
previously considered fiduciaries will now have to take on that role. So, why
is that such a bad thing? Well, it’s not per se, but the implications of how
this may change the way the investors and their companies
function may leave them frustrated and tentative towards some future business. But before we
get too bent out of shape, let’s break it down and see what we’re truly looking
In April 2016, the Department of Labor (DOL) laid out its plan to implement
the “New Fiduciary Rule” or “Best Interest Rule.” At its core, the rule raises
the fiduciary standard of investment advisers to match that which already applied to
RIA’s (registered investment advisers). The central focus of the DOL guidelines is
to protect plan participants from conflicts of interest related to investment
advice that could threaten their retirement savings. Since its inception, the
rule has been met with confusion, controversy, delays, and lawsuits as providers
struggle to understand how the new rule will affect the way in which they do
business. The rule, originally scheduled to begin phase one in April 2017, was
partly implemented in June. After several delays, further phases of the rule
meant to be implemented in January 2018 have now been pushed back to July 2019.
The rule expands the “investment advice fiduciary” definition under the
Employee Retirement Income Security Act of 1974 (ERISA). As of June 9, 2017, all
financial professionals who provide advice on retirement plans are considered
fiduciaries and must act in their clients’ best interests. Previously, only
RIA’s who charged a fee for service on retirement plans were considered
fiduciaries. While the rule will have an overall impact on the retirement
industry, it will heavily impact advisers whose
compensation is paid on a commission basis. A fee-based adviser, or RIA, gets
paid the same amount regardless of the investment offering or investment
selection provided within the plan. A commission-based adviser can be paid in a
myriad of ways from different investment companies. These fees are typically
volume based and can vary from fund to fund and even share class to share class.
This is not to say that a commission-based broker cannot provide good advice for
your plan. They did not create the system by which they are paid. But true or
not, the DOL views commission based pay as a deterrent to being able to provide
objective investment advice to plan sponsors and participants.
No. In addition to qualified retirement plans, the new rule expands the
fiduciary standard applied to both traditional and Roth IRA’s. So, any advice or
investments offered for plan distributions will be subject to the rule. In
addition, Health Savings Accounts (HSAs), Medical Savings Accounts (MSAs),
SIMPLE IRAs, and SEP IRAs also fall under the new rule’s protection. Now, a
financial professional who advises on the investments in an HSA is considered a
fiduciary. The result is that brokers and advisers will be limited to how they
can be compensated for the guidance they provide on these types of accounts.
The DOL’s new rule has a large impact on the investment industry. Not only
have the compensation models that the rule aims to remove been in place for a
long time, compliance with the expanded fiduciary rule is not clearly defined
at this point. Moreover, the industry will have to implement sweeping changes to
contracts with their advisers, compensation models, systemization and compliance
oversight, etc. It isn’t as though they are unwilling, but the scope of the
changes to an already heavily regulated industry shouldn’t be minimized. In
addition, many wonder if the regulations will even survive the administrative
review process. Implementing the change required to handle the increased
fiduciary responsibility and proof of compliance may raise the cost of doing
business, so plans could see investment fees increase in the future.
Some firms are prohibiting brokers and advisers from giving rollover advice
on 401(k) assets and taking up a strictly educational role to avoid liability.
Investment professionals that give advice must produce additional documentation on plan fees
and services to determine if a rollover is in their best interest, which can
Why do you care about this and what should you be doing? According to a 2017
Personal Capital survey, 46% of Americans thought that their financial adviser
was already required to meet this level of fiduciary responsibility.
Financial advisers play a pivotal role in retirement planning and their advice
can make an enormous difference in retirement savings.
While the rule is targeted primarily at providers of retirement plan products
and services, it will also affect plan sponsors. Plan sponsors should expect to
receive new disclosures and amended contracts from their advisers and need to
review and understand the nature of the relationships they have with their
advisers. The decision to hire or retain service providers remains a fiduciary
decision, and plan sponsors have an ongoing duty to monitor those advisers.
Failure to do so could subject plan sponsors to potential ERISA fiduciary
Since rollover or distribution recommendations will be covered by the new
conflict of interest rule, some service providers may be less willing to assist
participants with the decision of whether, or not, to roll over their plan
assets to an IRA. This will effectively allow them to avoid being held to the
standard of fiduciary in giving advice on such a decision. It’s a notable change
to the rules and may result in participants electing to leave assets in the plan
Plan sponsors should also take a close look at the investment education that
is provided to plan participants and beneficiaries to ensure that the investment
education qualifies as education rather than advice under the new rules.
Back in our June 2017 issue we took time to address the uptick in automated
financial advice that is getting a foothold in the investment world in our
article “Rise of the Machines”. It appears the new rules being issued will give
even further cause for advisers to consider the possible value in utilizing the
Robo-Adviser platforms as an investment tool for their clients.
With future compliance challenges arising, development of this technology and
its application may greatly aid broker-dealers in their efforts to comply with
the new regulations. Updated software solutions may alleviate some of the fiscal
impact associated with the stiffer compliance rules as well. Automated programs
employed to create trading algorithms that are always in compliance with the DOL
rules, regardless of market conditions or client circumstances, and devoid of
human error continue to make them an attractive tool for investors and advisers
alike. Regulator approval may be garnered by the fact that many of these
programs already use low-cost index funds for their trading.
So, what does all of this mean? The back and forth nature of proceedings with
regards to the new rule is a bit mysterious to many in the retirement and
investment communities but there is hope that some further clarity will be
provided when the Dept. of Labor releases its proposal. The 18-month delay would
allow for the DOL to coordinate with the Securities and Exchange Commission
(which could possibly offer up its own fiduciary rule), broker-dealer regulator
FINRA (Financial Industry Regulatory Authority), and state insurance
For now, compliance will be pushed back and the question remains whether the
delay is to allow for more efficient implementation of the rule as is or to
allow time for revisions, making the outcome even more uncertain.
Whatever the coming months hold for the New Fiduciary Rule, the resulting
outcome is going to require a level of greater fiduciary responsibility for
those directly involved with influencing the retirement plan process. Despite
what possible cost and increased responsibility the new rule may bestow upon us,
it is time to accept this new level of accountability as a positive next step in
the overall picture of retirement planning. Familiarizing yourself with the details of your plan, and your responsibilities
to it, is paramount to becoming a successful fiduciary. It’s important to
utilize all the information available to you and maintain a strong relationship
with your adviser and TPA.
Times can get tough for people. With the onset of Hurricane Harvey having
decimated parts of the Gulf Coast and Hurricane Irma following its destructive
lead, we are reminded that at any point we may find ourselves in hardship.
Companies make layoffs, natural disasters occur, emergencies… well, emerge. With
nowhere else to turn, some will look to their 401k for their own disaster
relief. A withdrawal in the form of a “hardship distribution” is one of the
tools that participants may use in this situation. This year the IRS released
new examination guidelines for documenting hardships. Their intent is to clarify
the documentation process of proving the existence of a hardship and verifying
that the amount withdrawn did not exceed the actual financial need.
Before we go into the regulations surrounding a hardship withdrawal, it is
important to define what a hardship is. A hardship distribution is a withdrawal
from a participant’s retirement account made because of an immediate and heavy
financial need. It is limited to the amount necessary to satisfy that financial
need but may include amounts required to pay the taxes and penalties. While
living conditions and lifestyle choices differ for everyone, the government has
created a universal list of events that may cause undue financial strain. The
- Qualifying medical expenses.
- Costs related to a principal residence (But not mortgage payments).
- Prevention of eviction.
- Burial or funeral expenses.
- Repair of damages to principal residence (Especially important
during hurricane season).
Does your plan allow for hardship distributions? This is an important
question to consider as the plan sponsor and if the answer is yes, there are
certain responsibilities you must undertake to justify the withdrawal from your
plan’s assets. Many 401(k) plans allow for hardship withdrawals since it is
generally believed to encourage participation levels. Participants seem more at
ease knowing that they could access their accounts in the event of an immediate
So, how does a participant justify and their employer verify that the
withdrawal amount of a hardship requested complies with the regulations? The IRS
regulations require that the plan administrator obtain source documents (or a
summary of that information), issue the required employee notifications that
accompany a hardship withdrawal, and verify they meet the hardship requirements.
So, how have things changed? Historically, to keep employers from being in a
position of reviewing the employee’s financial situation or judging how critical
their hardship need is, the participant was able to demonstrate their hardship
through an “attestation”. While it was understood that if audited the
participant would have to produce the proof, problems producing that proof arose
at times, especially when the participant was no longer available. This left the
plan in a precarious position with distributions not being justified or not for
the proper amount. However, a participant attesting to the fact that they need a
hardship distribution isn’t enough to move forward anymore. Difficulty in
verifying the need and the appropriate distributable amount was simply leading
to too many problems.
How does one avoid trouble with a hardship in an audit? Two words… source
documents. Auditors will look for documentation supporting the event like
receipts, medical bills, tuition expenses, contracts, or a summary of these
examples, and they can be provided electronically. The recipient also must agree
to keep these documents and be able to produce them upon request if needed (say…
for an audit). This documentation is critical and especially helpful in
instances where the employee has moved on.
The second key step in the guidelines is disclosure. You must provide the
employee who requests a hardship with all pertinent tax and possible withdrawal
penalty information. It also needs to be made clear exactly what can be taken as
a distribution and from what sources. Depending on the source of the funds,
different rules apply to the participant’s ability to make a withdrawal and will
be outlined in the plan documents.
If you’ve been going about hardships in this fashion, keep going, you’re
doing great. If you haven’t and your plan offers them, tighten up your
procedures moving forward. While hardship withdrawals from retirement savings
should be a participant’s last resort, they have increased every year over the
last five years and that trend is likely to continue. Your familiarity and
efficiency in relation to the process will help participants navigate otherwise