by  /  News, Retirement Planning

In the last submission we discussed the various definitions and requirements of the DoL’s new Fiduciary Rule on ERISA qualified retirement plans (such as 401(k) plans and pensions) and IRAs. We now turn to exemptions from application of the new rules and what the long-term impact of the rules might be.

  • The new fiduciary rules apply ERISA’s prudence and exclusive client benefit rules, as well as the prohibited transaction rules, to investment advisors to retirement plans. ERISA prohibits a fiduciary from exercising its discretion such that its compensation could vary based on the advice given or securities recommended. Absent the exemptions discussed below, advisors would be precluded from receiving third party payments, commissions or other variable remuneration and payments related to products purchased by their retail retirement clients.
  • One exemption involves financial institutions that serve as principal in the purchase or sale of securities (such as bonds or CDs) to clients, but the key exemption is the Best Interest Contract Exemption (“BICE”). BICE allows financial institutions and advisors to retail retirement clients to receive forms of compensation that would otherwise be prohibited, such as commissions and revenue sharing payments, subject to compliance with a number of conditions.
  • Broadly, BICE allows advisors and institutions to receive otherwise prohibited forms of compensation (commissions) resulting from recommendations to a retail retirement customer as long as:
    • The institution or advisor adheres to Impartial Conduct Standards (“ICS”) (below);
    • It adopts and complies with policies and procedures designed to ensure compliance with the ICS; and
    • It complies with certain recordkeeping and disclosure requirements.
  • BICE applies differently to IRAs than it does to qualified ERISA plans and includes different procedural requirements for new clients than for clients with an existing investment advisory agreement covering their IRA:
    • The new client and the institution must enter into an enforceable contract prior to or at the time of the first recommended transaction, in which the institution:
      • Acknowledges it is a fiduciary;
      • Agrees to adhere to the ICS;
      • Warrants adoption of and compliance with, anti-conflict policies and procedures; and
      • Provides the required disclosures as to fees and conflicts of interest.
    • The contract cannot include provisions disclaiming or limiting the liability of the institution or the client waiving its right to bring a court action or bind itself to arbitration.
    • The institution must comply with recordkeeping requirements and must notify the DoL of its intention to rely on the BICE before receiving any compensation.
    • These same provisions apply to existing IRA clients, except that a separate BICE contract need not be physically signed. A “negative consent procedure” is permitted, with the institution delivering a revised contract with the required provisions and if the client does not terminate the contract within thirty days, it is considered effective.
  • ERISA qualified plan clients do not require a separate BICE contract, but the other requirements still apply.
  • Generally, an advisor will not be required to rely on BICE when its fees are level, because it exercises no discretion over fee income. If an advisor recommends a participant roll money out of an ERISA plan into an IRA that will bear ongoing fees (even if level), requires disclosures and compliance with ICS standards.
  • Adherence to ICS means that:
    • The advisor will provide investment advice that is the Best Interest of the client;
    • The compensation is not in excess of what ERISA defines as reasonable; and
    • The advisor does not make materially misleading statements regarding the recommended transaction, fees or material conflicts of interest.

We have discussed the new Fiduciary definitions and requirements for investment advisors to qualified ERISA plans and IRAs and we have now discussed the exemptions from the new requirements and how to satisfy them. What does this mean to the public retirement plan client?

  • The Fiduciary Rule drastically extends the scope of ERISA to vast segments of the retirement market that did not exist at the time of ERISA’s adoption.
  • The SEC recently announced that it will adopt a fiduciary rule applicable to all clients of registered investment advisors, prior to April 2017.
  • Hopefully this is the first step, albeit by the DoL, in lieu of Congress or the SEC, that opens the duty of care of investment advisors to public scrutiny. For too many years the federal government has listened to the lobbyists of big Wall Street firms and their limitless campaign financial support.
  • Remember that the White House estimated that the new Fiduciary Rule will result in a $76 billion gain in retirement plans over the next 20 years. The fairness sought in this rule is of HUGE value to today’s retirement investor.
  • When it comes to an issue as important as our retirement system, proactive governance is necessary and to be celebrated. Those retiring over the next 20 years are entitled to a fair system.

We will expand our retirement plan discussions next submission.

Remember, it’s not what you make that matters…it’s what you keep!

The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties.  Please seek advice from an independent tax advisor before acting on any information presented.