Stricter Fiduciary Standards?


As anticipated, the Department of Labor has released its proposed new fiduciary rule, which recommends redefining when “fiduciary status” is triggered for professionals who provide financial advice related to retirement savings. Serious legal challenges are anticipated while the proposal is open for public comment. Nonetheless, it is important for plan sponsors to understand the rationale.

Conflicts of Interest…

Plan Sponsor reminds us that currently, there is a five-part test which determines whether or not an adviser is “acting in a fiduciary capacity,” and explains that the proposed rule has a three-part test, which would essentially result “in a stricter regulatory environment for financial professionals advising or selling investment products related to retirement saving”:

The first two criteria in the proposal say that if the adviser either invests money with discretionary authority or claims to be acting in a fiduciary capacity, the adviser is a fiduciary. The third criterion is more complicated and more controversial: an adviser is a fiduciary if the adviser renders paid advice “to investors on a regular basis as part of their business and the recommendation is provided under circumstances indicating that the recommendation is based on the particular needs or individual circumstances of the retirement investor and may be relied upon by the retirement investor as a basis for investment decisions that are in the retirement investor’s best interest.”This element essentially re-applies the “regular basis” requirement of the traditional five-part test to an adviser’s relationship with the public, or individual clients in aggregate, rather than applying it to the investors as individuals and their relationship with the adviser.

As attorney Carol McClarnon sums up the proposed approach, the “DOL is saying that regular basis is running your business.” In other words, “no long term client relationship is needed to be considered a fiduciary,” since essentially, “if you are a financial professional, you are satisfying the regular basis prong and are acting as a fiduciary.” At  Groom Law Group, David Levine, observes that the proposal aims to “assert the DOL’s authority under ERISA over any retirement account, and any annuity purchase made with plan assets, and recommendations in these spaces would be subject to ERISA fiduciary standards.”Insurance News Net has shared a fact sheet issued by White House leaders which notes that the intent of the proposed fiduciary rule is to “work to eliminate junk fees and promote competition…”. As the fact sheet explains:

 Junk fees are chipping away at…savings, going to financial advisers with conflicts of interests instead of to American families, and making retirements less secure. Right now, when a financial adviser provides retirement advice, they may be paid by the saver or by the firm who makes the investment product they recommend … .When a firm pays a retirement adviser more to recommend a specific investment product…that often leads to Americans selecting an investment product…that generates lower returns…..When the saver pays for advice that is not in their best interest, and it comes at a hidden cost to their lifetime savings, that’s a junk fee.These costs add up. Requiring advisers to make recommendations in the savers’ best interest can increase retirement savers’ returns by between 0.2% and 1.20% per year. Over a lifetime, that can add up to 20% more retirement savings… that could otherwise have been lost to junk fees.

 Though the proposed new fiduciary rule faces a long and winding road forward, this remains true for retirement plan sponsors: we are fiduciaries and must exercise prudence with plan fees and options, and continuously monitor all service providers. Failure, including inaction, comes with consequences. For example, the DOL’s Employee Benefits Administration (EBSA) division regularly pursues violations of ERISA. Examples of civil violations related to pension plans include: “Failing to operate the plan prudently and for the exclusive benefit of participants; and, failing to properly select and monitor service providers.”

 Of course, even with diligence, mistakes and oversights occur, and when they do, fiduciaries, including plan sponsors, risk personal accountability for breaches under the high standards of ERISA. Protection is a best practice for plan sponsors, and Colonial Surety offers affordable and efficient protection. In the event of a lawsuit, our Fiduciary Liability Insurance covers defense costs and penalty limits up to $1,000,000. Additionally, at no extra cost, we automatically include Cyber Liability Insurance to protect your plan and business. Our annual premium costs less than just one hour with an ERISA lawyer if confronted with allegations. Get protected in minutes, now:

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