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Delay seen as making DOL fiduciary rule more likely

Plan execs feeling more confident; providers pushed to get things ready

Stephen McCaffrey
Stephen McCaffrey thinks that no matter what happens eventually, sponsors will be big winners in the end.

Despite a concerted effort to kill the fiduciary rule, the Department of Labor's recent decision to grant a 60-day delay in the rule's implementation is giving plan sponsors more certainty that the rule will stick —and putting more pressure on service providers to be ready by June.

The DOL decision to push back the rule's April 10 start date instead of holding up the rule indefinitely to address a White House call for wholesale review also has dimmed prospects for major changes in the future.

For plan sponsors, the two-month delay “is probably encouraging. It looks like it's going to be a robust standard,” said Patrick DiCarlo, a benefits lawyer with the Alston & Bird LLP law firm in Washington.

The delay decision, issued April 4 by the department's Employee Benefits Security Administration, also gives officials time to sift through public comments on President Donald Trump's Feb. 3 memorandum directing the EBSA to examine whether the new fiduciary rule might adversely affect Americans' ability to access retirement advice.

Opponents, who have lost several legal challenges seeking to stop it, were discouraged that the delay notice left intact the guiding principles of the rule, finding “little basis for concluding that advisers need more time to give advice that is in the retirement investors' best interest and free from misrepresentations in exchange for reasonable compensation.” Critics also were taken aback by the significant numbers of comments opposed to any delay — 178,000 vs. 15,000 favoring a delay.

Less onerous rules

Still, opponents are holding out hope the presidential memo will spur less onerous rules if not outright relief, particularly for firms serving retail investors.

“We are concerned that the rule contains convoluted extraneous conditions that are not only based on imperfect data but contradict the intent” of the memo, said Kenneth E. Bentsen Jr., president and CEO of the Securities Industry and Financial Markets Association, Washington, which represents broker-dealers, banks and money managers. “The memorandum directs a review of the entire rule and its impact, not part (of it),” Mr. Bentsen said.

Service providers must have systems in place to follow standards dictated by the rule, including easy-to-understand compensation practices, by June 9. On that date, DOL officials could start enforcing the fiduciary regulation in the context of plans covered by the Employee Income Security Act, although in the delay notice they promised a “compliance-first” posture. Service providers choosing to act as fiduciaries also gain exemptions if they adhere to impartial conduct standards for covered transactions between June and January 2018, the implementation date for stricter “best interests” standards for documenting that they put clients first.

While most of the compliance burden with the new rule falls on service providers that have been gearing up for the changes all year, plan sponsors still need to be careful, said Kent Mason, a Washington-based lawyer with Davis & Harman LLP who represents several major financial institutions.

“The issues that have concerned plan sponsors relate to the overly broad definition of a fiduciary, which could make their human resources employees and call center personnel into fiduciaries. This possibility imposes severe monitoring obligations on plan sponsors,” he warns.

Regardless of what ultimately happens to the fiduciary rule, “sponsors must be attentive to changes in record-keeper policies” and may have opportunities to improve those relationships, said Stephen McCaffrey, president of the Plan Sponsor Council of America, Chicago. “A lot of the providers were giving plan sponsors new contracts. It might be the type of thing that could be very beneficial for plan sponsors.”

As record-keepers and financial planners come in with new service agreements, Mr. McCaffrey said, “the plan sponsor has to look at those agreements and what obligations they are taking on.”

Reviewing contracts and documenting that process is key, legal experts said. “Hopefully, plan sponsors are paying more attention to what they need to look for,” said Kathleen M. McBride, a New Jersey-based founder of the Committee for the Fiduciary Standard. She urges plan sponsors to train plan fiduciaries, and conduct independent benchmarking of fees and costs. “Plans are getting ripped off in much the same way as retail investors” when service provider practices like revenue-sharing are not in the plan's best interest, said Ms. McBride, and “the plan sponsor is completely on the hook for the responsibility.”

Rollovers are one area where the new fiduciary rule could help plan participants, said PSCA's Mr. McCaffrey. Plan sponsors have always been fiduciaries, with responsibility to monitor record-keepers and outside managers for what participants are told about leaving money with the sponsor or rolling it into a separate IRA, and some did negotiate the ability to listen in on phone calls to see what is being said to participants. “Now with the rule, that burden is being placed on record-keepers, advisers — anybody who is giving advice. You are seeing a lot of movement,” Mr. McCaffrey said.

Emphasize education

Dominic DeMatties, a former federal benefits tax attorney now a partner with Alston & Bird LLP, advised sponsors to negotiate service provider contracts that emphasize education. “I think that the basic thrust of the advice is that participants are advised of options, as opposed to being provided specific recommendations,” he said.

Even if the fiduciary rule changes again after the review, “people are asking the questions they need to ask. That horse is out of the barn,” said Mr. McCaffrey. “If the rule doesn't stay up, we are going to have to push (service providers) again about that. We wanted the ability to educate our employees and know we are not going to get in trouble. Even if the rule changes, it's almost a moral obligation to your participants to let them know who is working on their behalf.”

Some record-keepers are taking up the fiduciary role. But for those that do not, plan sponsors will have less paperwork to review but should still consider whether their participants are deriving sufficient value to keep those record-keepers on, said Michael Weddell, senior consultant with Willis Towers Watson's benefits advisory and compliance group in Southfield, Mich. He estimates that for sponsors working with the roughly two-thirds of record-keepers not yet signing up as fiduciaries, the questions are whether participants are missing out on some improvements and could be getting better services for the same fees.

“As a sponsor, in the long term the decision is back on you because you can switch record keepers,” said Mr. Waddell. Sponsors should also look at investment advisers for managed account providers. “If we are bringing in other advisers to talk to plan participants, there are a few other providers to take a look at and you have to ask, `will they play in the sandbox together?'” he said. Still, he does not expect major changes in investment options. “The market sorted this out a long time ago. For 401(k) sponsors, it's sort of amusing that this debate is taking so long.”

Ms. McBride, an accredited investment fiduciary analyst, thinks small and midsized plans stand to gain the most with the new rule. “It's a very, very good step for sponsors because it tightens up a lot of the deception that has plagued them. It's a big market, and people who do this the right way know it can be done.”

This article originally appeared in the April 17, 2017 print issue as, "Delay seen as making fiduciary rule more likely".