Smaller financial advisory firms may not be ready for the
regulatory world they’re living in now that the DOL is policing most of a
retirement-savings advice rule.
On Tuesday, the Department of Labor began enforcing an
investment advice regulation for retirement accounts that was approved by the
agency late in the Trump administration.
The DOL fiduciary rule provides exemptions under federal
retirement law — the Employee Retirement Income Security Act — allowing
retirement-plan fiduciaries to receive compensation for advice that would
otherwise be prohibited, such as third-party payments, as long as they act in a
retirement saver’s best interests.
To qualify for exemption, most advisers making
recommendations for retirement accounts must declare their fiduciary status in
writing to their clients. They also must disclose their compensation structure
and conflicts of interest, and adopt policies and procedures to comply with
impartial conduct standards.
The regulation would trigger a fiduciary standard of care
for most recommendations to roll retirement funds over from 401(k) plans to
individual retirement accounts.
Some smaller firms are not fully aware of the new requirements
and could have inadvertently missed the Feb. 1 deadline, said Fred Reish, a
partner at Faegre Drinker Biddle & Reath. There’s also the risk that their
policies and procedures won’t withstand regulatory scrutiny.
“For example, some firms may not appreciate the process
required, and the information that must be gathered to make a compliant
rollover recommendation,” Reish wrote in an email.
The fiduciary rule became effective last February and the
DOL was slated to begin enforcing it in December. But the agency delayed
implementation for most of the rule until Tuesday.
Another part of the rule will go into force on July 1. At
that time, retirement advisers must document and disclose why a rollover
recommendation is in a client’s best interests.
The rule is in place after years of work on the issue. An
Obama administration fiduciary rule was vacated by a federal court, which led
to the Trump administration version.
Despite the long regulatory road, implementation will be a
heavy lift, said Barry Salkin, a senior attorney at Wagner Law Group.
Financial firms “have had a substantial amount of time to do
it,” Salkin said. “I don’t know if they’re there yet. There are still items
you’d like to have the DOL provide more guidance on.
The insurance firm Principal was ready for Tuesday’s
compliance deadline in part because of changes it made to its policies to
prepare for the Obama-era rule, said Lance Schoening, director of policy for
Principal Financial Group.
For instance, the firm’s advisers don’t make rollover
recommendations immediately when someone has had a life event — such as
retiring or losing a job — that might affect their 401(k) plan. Instead,
Principal initially focuses on educating the person about his or her options.
“We’ve maintained a number of procedures that have helped us
run on a track to comply with the new prohibited transaction exemption,”
Schoening said.
The extra time to prepare internal systems for documenting
rollover decisions — and comparing a new plan to a client’s existing plan —
will be helpful, he said. “Firms are going to have to really focus on getting
that information from their clients.”
The fiduciary rule that is now in force covers investment
advisers and brokers and is meant to align with the Securities and Exchange
Commission’s Regulation Best Interest, the broker standard of care.
But independent insurance agents are governed by a different
rule, known as 84-24. Those advisers are policing themselves, said Ryan Brown,
corporate counsel at M&O Marketing.
“No financial institution has raised its hand to say we’ll
make sure insurance agents are in compliance with this,” Brown said.
The DOL has on its agenda another rulemaking proposal that
likely would expand the definition of who is a fiduciary and include more
advisers, such as insurance agents who are not adhering to 84-24.
“The anticipation is that the department may want to conform
those exemptions to the new exemption that is [now] online,” Schoening said.
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