The White House and the U.S. Department of Labor (“DOL”) have released new information concerning the DOL’s highly anticipated proposal to revise its fiduciary definition under ERISA. The DOL proposal has not yet been published, but the Obama Administration has arranged this coordinated release of information as part of its ongoing efforts to promote the proposed rule change.
Broader Fiduciary Definition. Updated information concerning the DOL fiduciary proposal was circulated through a newly released fact sheet from the White House as well as FAQs posted on the DOL’s website. As discussed in these releases, the DOL proposal would indeed broaden the definition of “investment advice,” which in turn would broaden the scope of advisors to plan clients who would be viewed as fiduciaries for ERISA purposes.
New Fiduciary Standard and Exemption. Under the proposed rule, advisors under the new fiduciary definition would be required to put their client’s best interest first. However, the proposed rule would not require advisors to eliminate their conflicts of interest. Instead, the proposal would include a prohibited transaction exemption that would merely require advisors to mitigate their conflicts and also disclose them. The new exemption would be “principles-based” (i.e. based on general principles rather than detailed “rules-based” requirements), providing advisors with the flexibility to adopt appropriate practices and adapt them over time.
Although the applicable releases do not explicitly reference the Investment Advisers Act of 1940 (the “Advisers Act”), based on the description of the new fiduciary standard and exemption, it appears that the DOL fiduciary proposal would impose a set of principles-based requirements on advisors to plan sponsors and participants that would be analogous to those found under the Advisers Act.
No Ban on Commissions or Non-Fiduciary Education. The applicable releases state that the DOL remains committed to ensuring that all common forms of compensation, including commissions and revenue sharing, would still be permitted under the proposal. Thus, it appears that the new exemption under the DOL proposal would permit the receipt of “variable compensation” so long as the conflict is mitigated under the advisor’s practices and fully disclosed. The releases also state that advisors would continue to be able to provide general education on retirement savings across plans and IRAs without triggering fiduciary status. For example, when providing guidance on the mix of stocks and bonds that a person should have based on his or her expected retirement date, the advisor should be able to provide such guidance in a non-fiduciary capacity.
Next Steps for DOL Fiduciary Proposal. Although the DOL proposal has not yet been published, Labor Secretary Thomas Perez has informally stated that the proposed rulemaking is being submitted to the Office of Management and Budget (“OMB”). Following a standard interagency review at OMB, which is expected to be completed within 90 days, the DOL proposal would finally be made available to the public.
CEA Report on Conflicted Advice. In addition to the releases described above, the White House Council of Economic Advisers (“CEA”) released a report analyzing the economic cost of conflicts of interest. The report makes the following conclusions:
- Conflicted advice lowers investment returns by roughly 1 percent annually.
- The aggregate annual cost of conflicted advice for IRA assets is roughly $17 billion each year.
- A retiree receiving conflicted rollover advice will lose roughly 12 percent if the savings are drawn down over 30 years.
The focus of the CEA report suggests that the DOL fiduciary proposal will include significant restrictions on advisors seeking to provide rollover advice to participants. Presumably, the CEA report will be used to support the DOL’s required economic analysis for its proposed rulemaking, quantifying the costs of conflicts and the expected impact of the rule.
Web Links.
The White House fact sheet is available online at:
The DOL’s FAQs are available online at:
https://www.askebsa.dol.gov/SavingsFitness/Worksheets
The CEA report is available online at:
https://obamawhitehouse.archives.gov/sites/default/files/docs/cea_coi_report_final.pdf