Tuesday, April 14, 2015

A Revised Fiduciary Standard Proposal from the DOL

The Department of Labor has issued its long awaited reproposal of fiduciary standards for advisors of ERISA retirement plans.   These new rules propose to expand the scope of the the definition of fiduciary under ERISA in order to capture more of the current services of 401(k) and IRA providers.  

Today's reproposal has had a rocky past.  In 2010 the Department of Labor issued a proposal to amend ERISA fiduciary language to establish a more uniform standard between those providing investment advice, and those providing market-making services. The proposal would have defined the term “fiduciary” more broadly under ERISA to include any person who provided investment advise to plans for compensation, regardless of whether they were registered investment advisors or broker-dealers. The 2010 proposal was met with great outcry, and subsequently withdrawn.  After what Labor Secretary Perez characterized as “an exhaustive and robust outreach process," the DOL has issued today's revamped proposal.

As expected, today's proposal applies a "best interest standard" more widely.  If adopted, the proposal would treat persons who provide investment advice or recommendations to an employee benefit plan, plan fiduciary, plan participant or beneficiary, IRA, or IRA owner as fiduciaries under ERISA and the Internal Revenue Code. The new rules would sweep in a wider array of advice relationships than the existing ERISA and Code regulations, which would be replaced.

While the objective to protect retirement plan beneficiaries from potential conflicts of interest, backdoor payments, and hidden fees remains the same, the reproposal differs from the original in that it determines who is a fiduciary not by job titles, but by the kind of advice rendered to a plan.  The new proposal also provides a broad, principles-based exemption that can accommodate and adapt to the broad range of evolving business practices,

Many in the industry have fought long and hard against these changes. Secretary Perez says that the DOL has been responsive to the concerns of industry participants and, rather than waiting, has included proposed exemptions simultaneously with the rule proposal.  Further, the DOL will be issuing a more robust analysis of the benefits to be reaped by investors should the rules be adopted.  

In addition, responding to criticisms that the process which began in 2009 has been rushed, Secretary Perez remarked, "I think it strains credibility to suggest that there is somehow an effort to rush the process.”

Comments on the proposal will be due in mid-July of 2015, 75 days after the release is published in the Federal Register. Following the initial comment period, the DOL plans to hold hearings, and then receive further comments for some period thereafter before considering adopting final rules.  

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