As is customary with the proposal of any new regulatory rule or provision, the Department of Labor has opened the floor to comments regarding its proposed rule change to extend fiduciary responsibilities to all advisors who work with qualified retirement plans. And, as expected, the response from industry representatives and investor advocates has been fairly boisterous, with lobbyists hitting peak stride in their efforts to diminish the hard lines around the rule change.
With a final ruling still off in the distance, it might be safe to assume that it’s business as usual for plan sponsors; however, it’s also safe to assume that, ultimately, the rule will definitely change, which should, at the very least, prompt plan sponsors to begin taking measure of what the rule change is trying to accomplish.
By understanding the premise of the proposed rule change and how it might affect the plan’s management in the future, plan sponsors can begin now to make incremental adjustments that can bring them closer to compliance and avoid the need for wholesale changes that can be very disruptive.
What is the fundamental premise of the rule change?
At its core the proposed rule change seeks to create a single standard by which all plan managers and advisors are measured in acting in the client’s best interest. Of course, industry representatives from across the spectrum all agree that acting in the best interest of the client should be the minimum standard. However, the devil is in the details as to how that standard will actually defined and enforced, which is where the rule’s “natural” proponents and opponents part ways.
The DoL has yet to provide specifics in defining the standard under the new rule; however, in the past it has broadly defined “best interests of client” as acting with the care, skill, prudence, and diligence under existing circumstances that any prudent person would exercise considering the specific characteristics of a person investing for retirement.
This level of fiduciary application pertains to anyone – from the plan sponsor, to the members of the investment committee to the plan’s investment advisor – involved in the selection and management of plan investments. And, its application is not limited to investment advice or the selection of investment options. It extends to any aspect of the plan’s management that if managed without regard for the participant’s best interest, could cause them harm. This is why, some will argue, the DoL’s primary target in the rule changes are fees and compensation - excessive or unreasonable fees; fees charged without relation to value provided; hidden fees; backdoor compensation or revenue-sharing, etc. – which can cause significant erosion of participants’ investment returns.
Plan Sponsors are liable for excessive/unreasonable fees
Of course, to get at the issue of fees, the rules for disclosure and transparency must change for non-fiduciary investment providers. Right now, plan sponsors have the fiduciary responsibility to ensure their plans don’t charge excessive or unreasonable fees; and that all fees must be disclosed to plan participants.
The problem is that the investment product providers many plan sponsors work with don’t share that fiduciary responsibility, nor do they want it. While they may provide investment fee disclosure, they leave it to the plan sponsor to decipher the cryptic language contained in their voluminous documents, which may not even include hidden fee arrangements such as revenue-sharing between mutual funds and brokers. Still, it is their fiduciary responsibility to ensure plan participants are fully aware of their investment costs.
The proposed rule seeks to upgrade this relationship to mirror the same type fiduciary relationship plan sponsors have with Registered Investment Advisors who are legally bound to share that fiduciary liability. Those opposed to the rule change cite increased compliance burdens that could drive them out of the market (Translation: That’s not the way we do business).