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A First Look at the DOL's Revised Fiduciary Rule



UPDATE: On April 6, 2016, the Department of Labor released the finalized rule. Read about the final version of the rule here.


April 20, 2015 -- "Times have changed" said U.S. Secretary of Labor Tom Perez, and "the regulatory structure must also change."

With that, he introduced the DOL's proposed new fiduciary rule which will expand the types of retirement investment advice covered by fiduciary protections.

Who Will Be a Fiduciary

Under DOL's proposed definition, any individual receiving compensation for providing advice that is individualized or specifically directed to a particular plan sponsor, plan participant, or IRA owner for consideration in making a retirement investment decision will now be a fiduciary -- the suitability standard is out.

Such decisions can include, but are not limited to, what assets to purchase or sell and whether to rollover from an employer-based plan to an IRA. The fiduciary can be a broker, registered investment adviser, insurance agent, or other type of adviser.

As a fiduciary 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 a new exemption intended to assure that the customer is adequately protected.

At least two areas that will not make one a fiduciary are:

  • Providing general investment education. The DOL's proposal 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 without triggering fiduciary duties.
  • Simple "order-taking." If a broker is simply in the role of executing an order to buy or sell without providing any recommendation, that transaction does not constitute investment advice. In such circumstances, the broker has no fiduciary responsibility to the plan sponsor.

Best Interest Contract Exemption

Under ERISA and the Internal Revenue Code, individuals providing fiduciary investment advice, including those covered by this proposed rule, to plan sponsors, plan participants, and IRA owners are not permitted to receive payments creating conflicts of interest without a prohibited transaction exemption (PTE).

The proposed rule creates a new PTE, the "best interest contract exemption." This new PTE will allow firms to continue to set their own compensation practices so long as they, among other things, commit to putting their client's best interest first and disclose any conflicts that may prevent them from doing so.

Common forms of compensation in use today, such as commissions and revenue sharing, will be permitted under this exemption, whether paid by the client or a third party such as a mutual fund.

To qualify for the new "best interest contract exemption," the company and individual adviser providing retirement investment advice must enter into a legally enforceable contract with the plan sponsor that:

  • Commits the firm and adviser to providing advice in the client's best interest. Committing to a best interest standard requires the adviser and the company to act with the care, skill, prudence, and diligence that a prudent person would exercise based on the current circumstances. In addition, both the firm and the adviser must avoid misleading statements about fees and conflicts of interest.
  • Must warrant that the firm has adopted policies and procedures designed to mitigate conflicts of interest. Specifically, the firm must warrant that it has identified material conflicts of interest and compensation structures that would encourage individual advisers to make recommendations that are not in clients' best interests and has adopted measures to mitigate any harmful impact on the client from those conflicts of interest.
  • Clearly and prominently discloses any conflicts of interest, like hidden fees often buried in the fine print or backdoor payments, which might prevent the adviser from providing advice in the client's best interest. The contract must also direct the customer to a webpage disclosing the compensation arrangements entered into by the adviser and firm and make customers aware of their right to complete information on the fees charged.

Rick Meigs, President, 401khelpcenter.com


The DOL has provided more information here.


Executive Summary on the DOL's Fiduciary Rule Proposal

Abstract: The Department of Labor's anticipated rule on conflicts of interest (aka, the Fiduciary Rule), is now available. Fi360 has prepared this five page an executive summary covering the basics of the rule.

DOL Proposes New Fiduciary Rule for Retirement Advisors

Abstract: The DOL published its long awaited proposed rule addressing conflicts of interest in retirement advice. This is an overview of the proposed rule prepared by the Wagner Law Group.

Game Changer: A First Look at the DOL's 2015 Conflict Of Interest Proposal

Abstract: The retirement plan industry has been waiting for an updated definition of fiduciary regulation from the DOL since 2010. On April 14, 2015, we got it and, at first glance, it's a game-changer. The purpose of this article is to provide a technical, "first glance" overview of the proposal and some early thoughts about possible ramifications.


Much of the information for this article was taken directly from the material provided by the Department of Labor.

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