The Fight Over Fiduciary Rules

If you’re the fiduciary for an organization, you may be excused if you’re feeling a headache coming on.

The U.S. Department of Labor first proposed a new definition of the term fiduciary in 2010, but withdrew it after receiving blowback from the business community and lawmakers.

Then it composed new guidance in April 2015, substantially changing the definition of fiduciary under ERISA and elevating many more financial professionals who work with retirement plans and individual-retirement accounts to fiduciaries.

The rules were upheld last month by the 10th Circuit only to be struck down by the Fifth Circuit two days later. It’s anybody’s guess whether the DOL, which has 45 days to challenge the court’s decision, will do so by May 7.

In the past, investment recommendations that met a client’s defined needs and objectives were considered suitable or perhaps appropriate for that individual, says Lori Shannon, a partner at Barnes & Thornburg.

“But under this new, expanded definition, [recommendations] can’t just be suitable,” she says. “Basically, all financial professionals who were working with these plans would become fiduciaries and held to a different standard. For lots of companies who maintained plans, it affected the services that investment advisers offered.”

Shannon believes the DOL probably won’t appeal the Fifth Circuit’s ruling, which stated that the department overstepped its authority. Instead, she says, another federal agency–the Securities & Exchange Commission–may step in at some point and develop its own set of fiduciary rules, which may look very different than the DOL rules.

Still, if you already implemented the DOL’s new procedures, continue observing them, she says.

“Do not let them fall by the wayside,” Shannon says. “You’ll see service providers adhere to the [new] standards to which they agreed upon during this time period. Make an effort to be compliant with this fiduciary rule until it’s settled one way or another. Some may be good ideas for participants even though they’re no longer required under the new fiduciary rule.”

From a plan-sponsor standpoint, it’s also important to be aware of changes that are happening with your service providers and their plans, adds Joan Neri, counsel at Drinker, Biddle & Reath.

“The plan sponsor needs to have an understanding of how rule changes can impact the activities of the service providers,” she says. “Pay attention to the service provider’s discloser, communications they send out, if and when the rule is vacated on May 7. If needed, get ERISA attorneys involved because there might be information that requires legal monitoring.”

In the meantime, by broadening the definition of a fiduciary, she says, the DOL cast too wide a net. Many fiduciaries found themselves in a prohibited transaction or activity because of the rule, which requires them to use special contract exemptions that were part of the rule’s packaging. She says it was these elements of the exemption, which also applied to IRAs, that extended beyond the DOL’s reach.

But for now, nothing has changed. Neri says HR leaders should continue monitoring their organization’s service providers, making sure their standards are prudent, that they’re acting in the best interest of plan participants and that they send a disclosure when entering into an arrangement that acknowledges their fiduciary status.

“We’re in a wait-and-see pattern,” says Neri. “HR should sit tight unless it sits on a fiduciary committee of a plan and is involved with vetting, selecting and monitoring service providers. I anticipate seeing a flurry of activity by plan service providers–come May 7 if the DOL rule is vacated–where they will be notifying the plan about changes in services, their status or maybe contracts.”

Robert Kaplan says most of his clients are indifferent about the DOL rules. As an associate at Ballard Spahr, Kaplan says, all his clients want is stability or certainty. Instead, the opposite has occurred.

He points to service providers that pulled back some services because they didn’t want to become a fiduciary. Yet others went full-steam ahead by offering even more.

“I think the right approach is to go back to the old version of the regulations and look to the SEC to govern this,” Kaplan says. “It shouldn’t matter whether the investment advice you’re receiving is for your 401(k), IRA or regular brokerage account. You should get the same level of service and fiduciary responsibility.”

He doesn’t believe service providers that expanded their services will turn back the clock and offer less. Still, a portion of the industry did pair back its offerings to avoid dealing with the rules entirely.

Kaplan says the right course of action is to cover IRAs in the definition of the investment advice fiduciary rules. He says the DOL is trying to do right by people by giving them protections. If someone is getting personal advice for a 401(k) or an IRA, he says, there shouldn’t be a different standard.

“The big complaint from the financial industry is different standards for different products don’t always make sense,” Kaplan says. “It’s the same people giving advice. It should be governed by the same standard.”

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Carol Patton
Carol Patton is a contributing editor for HRE who also writes HR articles and columns for business and education magazines. She can be reached at [email protected]