CFOs won’t have to worry about the controversial fiduciary rule changes for a while — if they even have to worry about those changes at all.
That’s because the feds just announced they’ve delayed the effective date for the remaining portions of the rule to take effect until July 1, 2019. These changes had been slated to kick in on Jan. 1, 2018.
3 key components
The feds’ move delays three key components of the fiduciary rule:
- the best-interest contract
- a class exemption for principal transactions in certain assets between fiduciaries and employee benefit plans, and
- certain transactions with insurance agents, brokers and consultants.
Although you’ll still have to abide by the new definition of fiduciary and partial conduct standards for the time-being, there are a number of industry insiders who believe this delay may the push needed to end the fiduciary rule changes once and for all.
“It’s a very clear attempt at death by delay,” said Andrew Stoltmann, a Chicago securities attorney and an official with the Public Investors Arbitration Bar Association, in an article by InvestmentNews. “The DOL, with Trump’s likely blessing, is trying to delay and gut the fiduciary duty rule.”
In a nutshell, the fiduciary rule was drafted to grant plan participants greater protections by requiring brokers and advisers to act in their clients’ best interest when doling out investment advice.
To ensure this standard, anyone providing investment advice – including brokers and advisers – will be designated as a fiduciary and must disclose any potential conflicts of interest to plan participants.
The basic rules governing retirement investment advice have not been meaningfully changed since 1975, despite the dramatic shift in our private retirement system away from defined benefit plans and into self-directed IRAs and 401(k)s, DOL officials announced.
When it first proposed the new rule, the Labor Department said it was seeking to:
- Require more retirement investment advisers to put their client’s best interest first, by expanding the types of retirement investment advice covered by fiduciary protections. Today large loopholes in the definition of retirement investment advice under outdated DOL rules expose many middle-class families, and especially IRA owners, to advice that may not be in their best interest. Under DOL’s proposed definition, any individual receiving compensation for providing advice that is individualized or specifically directed to a particular plan sponsor (e.g., an employer with a retirement plan), plan participant, or IRA owner for consideration in making a retirement investment decision is a fiduciary.
Being a fiduciary simply means that the adviser must provide impartial advice in their client’s best interest and cannot accept any payments creating conflicts of interest unless they qualify for an exemption intended to assure that the customer is adequately protected.
- Preserve access to retirement education. The Department’s proposal carefully carves out education from the definition of retirement investment advice so that advisers and plan sponsors can continue to provide general education on retirement saving across employment-based plans and IRAs without triggering fiduciary duties.
As an example, education could consist of general information about the mix of assets (e.g., stocks and bonds) an average person should have based on their age, income, and other circumstances, while avoiding suggesting specific stocks, bonds, or funds that should constitute that mix. This carve-out is similar to previously issued guidance to minimize the compliance burden on firms, but clarifies that references to specific investments would constitute advice subject to a fiduciary duty.
- Distinguish “order-taking” as a non-fiduciary activity. As under the current rules, when a customer calls a broker and tells the broker exactly what to buy or sell without asking for advice, that transaction does not constitute investment advice. In such circumstances, the broker has no fiduciary responsibility to the client.
- Carve out sales pitches to plan fiduciaries with financial expertise. Many large employer-based plans are managed by financial experts who are themselves fiduciaries and work with brokers or other advisers to purchase assets or construct a portfolio of investments that the plan offers to plan participants.
In such circumstances, the plan fiduciary is under a duty to look out for the participants’ best interest, and understands that if a broker promotes a product, the broker may be trying to sell them something rather than provide advice in their best interest. Accordingly, the proposed rule does not consider such transactions fiduciary investment advice if certain conditions are met.