What advisers need to know about the new DOL rule

The new interpretation on the definition of advice has some benefits for plan advisers, and it will be in place even if the rule is halted

The incoming Biden administration will almost certainly halt the DOL fiduciary rule’s prohibited transaction exemption, but the agency’s new definition of investment advice is in place for the foreseeable future.

On Tuesday, the Department of Labor announced that its new iteration of the fiduciary rule would be published in final form in the Federal Register, taking effect 60 days later. That applies to the prohibited transaction exemption that the regulator unveiled in June, although the new interpretation of the definition of fiduciary advice became effective immediately, as it applies to longstanding regulation, lawyers said.

It is widely expected that the Biden administration will halt the DOL fiduciary rule before it takes effect. The DOL could also completely change the formal definition of fiduciary investment advice, but until it does so, the interpretation made this week in the rule’s preamble will stand.

This week, the DOL noted that it has withdrawn an advisory opinion from 2005 known as the Deseret Letter. In doing so, the agency is viewing a recommendation to roll assets out of a 401(k) plan as the beginning of an advice relationship, regardless of whether the advice is given by a plan adviser or someone with no prior arrangement with a participant, said Jason Roberts, CEO of the Pension Resource Institute.

“I don’t think anybody really saw that coming,” Roberts said. “That type of policy — expanding the interpretation and capturing more activities as fiduciary and therefore subjecting those financial professionals and their firms to stricter standards of care … that’s something I can’t imagine that a Democratic DOL wants to undo.”

That development likely pleases investor advocates and “was certainly not something that the financial institutions broadly welcomed,” he said.

The DOL stated that it won’t enforce the new definition until a year after the exemption rule is published in the Federal Register, said Fred Reish, partner at Faegre Drinker, in an email.

“Don’t be confused by that, though. The expansion of the definition is not contingent on the exemption becoming final,” Reish wrote. “In my view, the new Democratic administration would favor that expansion.”

But that interpretation also means that retirement plan advisers are not necessarily disadvantaged compared to retail advisers in recommending rollovers, Roberts noted. Advisers serving a plan participant can still recommend IRA rollovers with higher fees, and more compensation for themselves, if they are able to document that the arrangement is in the best interest of the client.

This is potentially beneficial to retirement adviser aggregator firms that are pursuing more wealth management business from plan clients and provider a wider complement of financial services, Roberts noted.

And any advisers working with plan participants now have a clear way to comply with the law and recommend rollovers — essentially the same path that non-fiduciary counterparts had for those recommendations in the past, he said.

For the plan adviser, “I don’t have to look over my shoulder anymore. I know I can recommend rollovers if it’s in the client’s best interest,” he said.

Since the Obama-era fiduciary rule was vacated in court in 2018, the DOL has relied on a five-part test from 1975 to determine whether an adviser is a fiduciary under ERISA. Those criteria are: providing investment advice to a plan, on a regular basis, pursuant to a mutual agreement, serving as the primary basis for investment decisions and individualized for the plan or IRA.

HOLDING PATTERN

The DOL’s prohibited transaction class exemption was modeled on the SEC’s Regulation Best Interest and imposes impartial conduct standards associated with fiduciary investment advice.

The financial services industry has been preparing for different versions of a fiduciary rule for roughly a decade, but given the likelihood that the new DOL rule will be halted or scrapped, retirement adviser firms are holding off on implementing new procedures.

“We’re telling people, ‘let’s follow this, and this is interesting,’ but this is just another iteration of this fiduciary saga we’ve been seeing for five or six years,’” said Jennifer Doss, director and defined-contribution practice leader at Captrust. “We think this is probably going to get revisited by the Biden administration.”

IRA rollovers from plan participants are not a big part of the company’s business, so it is less affected than other entities like broker-dealers, Doss said.

Benefits and fee-only retirement RIA firm Zuna is “quick to get up to speed and slow to implement” procedures for the DOL rule, given the likely course by the next administration, said Bonnie Treichel, the firm’s chief operating and compliance officer. It will be more obvious in January what steps the DOL is likely to take, Treichel said.

It’s important for advisers and home offices to be well-versed in the DOL’s Field Assistance Bulletin 2018-02, she said. That bulletin provided a temporary enforcement policy, based on impartial conduct standards, after the Obama-era fiduciary rule was vacated.

Having good outside counsel and compliance consultants is recommended, she said.

“I would also be inventorying your business and understanding where the rule fit with various advisers and plans in your program,” she said.

INCOMING ADMINISTRATION

Regarding the exemption final rule, “I think there is an even chance that it will be kept and toughened,” Reish said. “While allowing conflicted advice is not typically a Democratic preference, parts of the exemption may be viewed favorably by the new administration because it more closely regulates advice, and particularly rollover recommendations and advice to IRAs.”

The Biden DOL could also take an aggressive stance on redefining investment advice, Roberts said. And that would lead to a need for different prohibited transaction exemptions.

During the two administrations before the Trump era, “the DOL regularly stated that it felt the current definition was outdated. It was written at a time when we were living in more of a defined-benefit world — everyone had a pension,” he said.

“This exemption at the end of the day is at risk, because the new DOL will likely have a bigger regulatory package.”