Frequently asked questions about the DOL fiduciary rule

Answers to common sources of confusion or misunderstanding about the new regulation

Apr 5, 2016 @ 2:46 pm

By Elizabeth MacBride

Q: Is the rule now final?

A: Yes, the Department of Labor released its final fiduciary rule on Wednesday, April 6.

Q: How is the final rule different from what was in the rule proposal?

A: The final rule released by DOL was significantly streamlined from what was initially proposed. Several of the changes involve the so-called best interest contract exemption. The legally binding exemption requires advisers to act as fiduciaries, but also gives them flexibility in compensation arrangements, allowing them to charge commissions or take revenue sharing.

The final rule clarifies that the contract does not have to be signed until an account is opened. Critics asserted the proposed rule would require the contract to go into effect before beginning a discussion with a client.The disclosures required under the contract have been reduced, including the elimination of the one-, five- and 10-year projections of returns and fees at the point of sale. The exemption has been clarified to ensure there is no bias against the sale of proprietary products.

In addition, the list of approved investment products for retirement accounts has been removed. Finally, the list of approved investment products for retirement accounts has been removed.

Q: Why did the DOL change the rule in the first place?

A: The DOL believes the current rules lead to conflicts of interest, which in turn result in higher costs for people saving for retirement. The DOL says conflicts lead, on average, to about 1 percentage point lower annual returns on retirement savings and $17 billion in losses every year.

Q: When is the last time the rules were changed?

A: The basic rules governing retirement investment advice have not been changed since 1975, according to the DOL. The DOL believes the rules should change as a result of the shift in the private retirement system away from defined-benefit plans and into self-directed IRAs and 401(k)s.

Q: How long will the industry have to make the changes required by the rule?

A: The initial implementation period for the rule has been extended from eight months to one year. Full compliance is “phased in” and won't be required until Jan. 1, 2018.

Q: Who does the rule apply to and what does it say?

A: The rule requires professionals receiving compensation for providing advice to individuals or to an employer with a retirement plan to act in their clients' best interests, or act as a fiduciary.

Q: Which kinds of professionals are subject to the rule?

A: The definition is based on the advice given, not the type of person giving the advice. The fiduciary can be a broker, registered investment adviser, insurance agent or other type of adviser.

Q: How are retirement plans defined?

A: 401(k)s and other employer-sponsored plans, IRAs and other tax-deferred accounts, such as health savings accounts, will be included in the rule.

Q: Could the outcome of the presidential election affect the rule?

A: A new administration can always change or roll back a rule. But many experts dismiss such a scenario as unlikely.

Q: What are some of the legal implications, especially for cases that are arbitrated?

A: Most disputes in the investment advisory industry are resolved by arbitration, and that is still likely to be the case. Advisers still will write the contracts their clients sign, which can require arbitration. But investors under the rule will have stronger ground to stand on: Because advisers and brokers will be required to sign contracts stating they put their clients' best interests first, investors have greater legal recourse.

Q: What are the consequences for an adviser who breaches fiduciary duty?

A: Fiduciaries are subject to personal liability for losses caused by a fiduciary breach. Fiduciaries also are subject to potentially large excise taxes for engaging in prohibited transactions, unless they qualify for an exemption. ERISA currently prohibits fiduciaries from completing transactions that involve conflicts of interest unless they disclose the conflicts and operate under the oversight of an independent fiduciary.

Q: Are there consequences for others in the retirement system, such as employers who sponsor plans, who are involved in conflicted advice?

A: Yes. The IRS can impose an excise tax on transactions based on conflicted advice. The Internal Revenue Code imposes an excise tax and can require the correction of such transactions involving plan sponsors, plan participants and beneficiaries, and IRA owners.

Q: Who is exempt from the new rule?

A: The DOL has said four groups are exempt:

• People who do not represent themselves to be ERISA fiduciaries, and who make it clear to the plan that they are acting for a purchaser or seller on the opposite side of the transaction from the plan, rather than providing impartial advice.

• Employers who provide general financial or investment information, such as recommendations on asset allocation, to 401(k) participants, or investment education.

• People who market investment option platforms to 401(k) plan fiduciaries on a non-individualized basis and disclose in writing that they are not providing impartial advice.

• Appraisers who provide investment values to plans to use only for reporting their assets to the DOL and IRS.

Q: Will commissions be allowed on sales of securities in retirement plans?

A: Yes. But based on what the DOL has said so far, the adviser and the client would be required to enter into a written contract with provisions including that all advice be in the best interests of the client, that conflicts be clearly disclosed and that procedures be in place to encourage advisers to make recommendations in the client's best interests.

In the rule, this is known as the Best Interest Contract (BIC) exemption.

Q: What is the BIC exemption?

A: The Best Interest Contract (BIC) exemption would allow advisers to continue working on commission. To qualify for the exemption, advisers would have to:

• Enter into a BIC with their clients.

• Provide the client with comprehensive disclosure of any conflicts of interest.

• Mitigate conflicts of interest in adviser compensation.

• Offer the client a range of investment options across asset classes.

• Suggest only investment products covered by the BIC. While the list of covered insurance products is not yet final, the draft exemption includes mutual funds and insurance and annuity products.

• Acknowledge that they are fiduciaries and are working in their clients' best interests.

Q: What disclosures are required under the BIC exemption?

A: In addition to this written contract, the adviser would be required to provide comprehensive disclosures, such as payments from sales.

The contract also must direct the customer to a webpage disclosing the compensation arrangements entered into by the adviser and firm and make customers aware of their right to complete information on the fees charged.

Q: Which pay structures are most advisable under the new rule?

A: Acceptable pay models include leveled compensation, flat fees and percent-of-assets compensation.

Q: Is any pay structure forbidden?

A: No. But the DOL advises firms to avoid using quotas, bonuses or contests to compensate advisers.

Q: What is the principal transaction exemption?

A: In addition to the new best interest contract exemption, the proposal has a new principles-based exemption for principal transactions, and maintains or revises many existing administrative exemptions. The principal transactions exemption would allow advisers to recommend certain fixed-income securities and sell them to the investor directly from the adviser's own inventory, as long as the adviser adheres to the exemption's consumer-protective conditions.

Q: What is the low-fee exemption?

A: The low-fee exemption would allow firms to accept payments that otherwise would be considered conflicted when recommending the lowest-fee products in a given product class, with fewer requirements than the best interest contract exemption.


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