Expected to impose higher standard of care on brokers; 'in-your-face disclaimer'
The Labor Department's fiduciary re-proposal is at least four months away, but that hasn't diminished speculation about what the rule will entail.
A panel of attorneys who specialize in the Employee Retirement Income Security Act of 1974 appeared at the American Society of Pension Professionals & Actuaries' annual 401(k) Summit in Las Vegas on Monday morning, discussing their expectations for the DOL's approach to the fiduciary rule. That proposal is expected to be issued in July.
Panelist C. Frederick Reish, a partner with Drinker Biddle Reath LLP, noted that while he doesn't think the rule will be disruptive for third-party administrators and registered investment advisers, broker-dealers and their reps won't be thrilled with the outcome.
“They'll likely say it's too much and that it goes too far,” he said. “The broker-dealer community isn't going to care for the fiduciary role, but I think there will be some relief in prohibited-transaction exemptions that will make it palatable.”
Marcia Wagner, managing director at The Wagner Law Group, predicted that the upcoming rule will have a carve-out allowing brokers to continue their relationships with 401(k) plans — they will have to disclose with an “in-your-face” disclaimer that they aren't fiduciaries.
Despite the impingements, IRA rollovers could turn out to be a lucrative business for brokers who have 401(k) clients. While a 2005 advisory opinion from the DOL has created significant obstacles that dissuade plan fiduciary advisers from trying to solicit workers for rollovers, advisers are permitted to educate workers on rollovers.
And there is some wiggle room if advisers make it clear to employers in a document that they don't have plan-related authority to sell rollover services. Ms. Wagner said advisers need to demonstrate in that document that they aren't using the authority and influence they have as a 401(k) adviser to work with employees leaving the plan.
“This [note] shows documentary evidence of a good-faith attempt to comply with these standards,” she added.
The panelists offered some prognostications on what the next big areas of legal activity will be for 401(k) plans.
Mr. Reish expects the DOL to put greater emphasis on uneven and undisclosed compensation going to service providers. Ms. Wagner expects greater focus on the due-diligence process involved in the selection of target date funds as qualified default investment alternatives within 401(k)s.
The Labor Department last week released its fiduciary checklist for analyzing target date funds — information that will be key in protecting plan sponsors and advisers. Among the most important tasks on the list is documenting the due-diligence process.
“Because of the crash for 2010 target date funds, there's a heightening of awareness from tort bars and regulators,” Ms. Wagner said. “If you don't rise to the expectation, the next market crash will lead to a lot of lawsuits.”
