The disclosure 401(k) advisers may be missing under the DOL fiduciary rule come June 9

The regulation will trigger a fiduciary acknowledgement from advisers. But, strangely, it's not a disclosure mandated by the rule itself

Jun 8, 2017 @ 5:24 pm

By Greg Iacurci

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When the Department of Labor's fiduciary rule kicks in June 9, previously non-fiduciary advisers to 401(k) plans will need to furnish important new disclosures to their clients acknowledging their newly minted fiduciary status.

The kicker: The action isn't mandated by the fiduciary rule itself, but another retirement rule already on the books. And failure to provide the disclosures could lead to some nasty repercussions for advisers and broker-dealers.

Bruce Ashton, a partner at Drinker Biddle & Reath, said the disclosures are a "big deal."

"They're all of a sudden now saying, 'Plan sponsor, plan fiduciaries, I'm also a fiduciary and that subjects me to some different standards,'" Mr. Ashton said.

'EASILY OVERLOOKED'

The provision in question is called 408(b)(2), a section of the Employee Retirement Income Security Act of 1974 that allows advisers, broker-dealers and other service providers to receive compensation, directly or indirectly, from a 401(k) plan under certain conditions.

A regulation in 2012 updated 408(b)(2) to mandate certain written disclosures from these service providers. The providers have to describe their services, compensation and "status" as a fiduciary to 401k) clients. These are onetime notifications, unless there's a change in the original information.

Between 2012 and the present day, brokers and other non-fiduciary providers to ERISA retirement plans largely didn't disclose they were fiduciaries, observers said.

"[Broker-dealers] either would say, 'By the way we're not a fiduciary, or they wouldn't say anything about fiduciary status," Mr. Ashton said.

However, the DOL fiduciary rule, which raises investment-advice standards in retirement accounts, triggers a massive change. Come June 9, tens of thousands of retirement plan advisers will take on fiduciary status with their clients for the first time, thereby triggering a change in "status" and therefore new disclosures.

"That's one thing that could very easily be overlooked," said Duane Thompson, senior policy analyst at fi360 Inc., a fiduciary consulting firm.

To give a sense of the scope, there are approximately 250,000 active, licensed financial advisers who either work on or get paid from a defined contribution plan, according to The Retirement Advisor University. Around 225,000 of those are "dabblers" who oversee less than five DC plans — these advisers are often non-fiduciaries.

'INTERESTING PROBLEM'

Because 408(b)(2) only applies to plan advisers, they represent the only adviser group that will need to furnish written acknowledgement of fiduciary status come June. As currently written, the fiduciary rule only makes this a necessity for other advisers, such as those working with IRAs, in January, when the full force of the rule kicks in.

The fiduciary disclosure creates "an interesting problem," said Jeffrey Lieberman, executive compensation and benefits counsel at Skadden, Arps, Slate, Meagher & Flom.

"There's at least some evidence when someone goes to sue you that you are a fiduciary," Mr. Lieberman said.

TIMING

The broker-dealers and advisers affected must, unless there are extraordinary circumstances, provide updated disclosures to plan fiduciaries within 60 days "from the date on which the covered service provider is informed of such a change [in status]."

However, this guidance is vague, as Fred Reish, partner at Drinker Biddle & Reath, notes in a recent blog. It could mean 60 days from the day it was determined the fiduciary rule would become applicable June 9; 60 days from June 9 itself; or from the first day an adviser makes an investment recommendation post-June 9, he said.

Mr. Reish therefore recommends a conservative position, and that the notice be sent in June.

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