Record-keepers such as Fidelity Investments and J.P. Morgan Retirement Plan Services likely will raise client fees and limit the guidance they provide if a proposed rule change that redefines “fiduciary” goes through, according to industry groups.
The Labor Department's proposed rule under the Employee Retirement Income Security Act would broaden the definition of a fiduciary to include companies providing services to retirement plans.
As a result, those service providers would curtail investment guidance to retirement plans and charge plans more for participant investment education, critics of the rule change said. Adoption of the rule could also complicate the rollover process, they contend.
Fees also would rise as providers passed on the cost of compliance or as the plan sponsors looked to an independent party to give them investment guidance, industry groups said in their comment letters on the rule.
The deadline for submitting comments to the Labor Department was Feb. 3, and a hearing has been scheduled for March 1.
“The proposed fiduciary redefinition lowers the threshold so that normal things that a provider does — such as giving the plan sponsor a sample list of funds — could potentially make them a fiduciary,” said Larry H. Goldbrum, general counsel of The Spark Institute Inc. The group, which represents retirement plan service providers, filed a comment letter.
The proposed DOL rule was floated in October amid a series of regulatory initiatives aimed at increasing transparency for plan sponsors and participants. It redefines when an investment adviser is acting as a fiduciary to a retirement plan, changing a five-part test that regulators say allowed advisers to skirt fiduciary responsibility while providing advice.
The expanded definition would not only make brokers working with plans fiduciaries, but also could apply to firms such as Fidelity and The Vanguard Group Inc., which provide investments, platforms and record-keeping services to retirement plans.
That prospect alarmed the Investment Company Institute, which in its comment letter called for the Labor Department to clarify an exception in its proposal to allow service providers to help plan fiduciaries pick funds for their own investment menus.
“Were record keepers to withdraw from providing assistance because of uncertainty about the rule, plans would have to forgo this information or hire an independent fiduciary at considerable cost,” the ICI wrote.
The rule also likely would shake up other aspects of the service providers' business, including changing the way platform providers charge other fund companies for shelf space.