Surprise (Not)! 401(k) Fiduciary Rule Uncertainty Continues

Dodd-Frank Act: Analyzing the Fiduciary Standard Impact

These poor guys have no idea what to do.

What a crazy ride.  President Obama signed the Dodd-Frank Act into law six years ago, giving the Securities & Exchange Commission (SEC) the authority to study the need for, and establish, a uniform fiduciary standard for personalized investment advice given to consumers.

In January 2011 the SEC staff published a study and made recommendations on the issue, but as of today, the SEC has not proposed any new regulation. Yet, regarding the need for a uniform fiduciary standard, we’ve weathered confusion, gained clarity, and stormed back into uncertainty.

While professionals in all facets of the financial industry were absorbing the possible implications of the Dodd-Frank law, the Department of Labor (DOL) proposed a fiduciary rule for comment. Years of discussion and debate followed. Among the most pertinent question:

This spring, the DOL released its final fiduciary regulation. For the next several weeks, the industry read, re-read, and contemplated the implications of the rule. During this relatively brief period, 401(k) plan sponsors and advisors gained some clarity with respect to exceptions to the rule, especially in the area of education and training.

Analysis from research and consulting giant Mercer delineated the differences between the old definition of fiduciary advice and the new one. The new rule applied to ERISA retirement plans, just as the old rule did, and also IRAs, HSAs, and Coverdell education savings accounts.[i]

Under the old rule, the only topic that fell under fiduciary investment advice was investments. With the new rule, “recommendations” with respect to investments, investment management, and distributions were all covered. Also, a single discussion providing personalized advice would fall under the rule.

The report concluded that plan sponsors’ relationships with participants would remain much as they always have been, although personalized distribution counseling may now be considered investment advice, which is pretty alarming for plan sponsors who just want to help 401(k) participants make the best choices.

In addition, Mercer pointed out that plan sponsors’ relationships with vendors could be affected as some vendors now may be considered fiduciaries.  And of course, participants’ relationships with their financial professionals are likely to change as a result of the Final Rule.

Not everyone found the changes in the final rule to be palatable, though. By early June, five lawsuits had been filed against the Department of Labor by coalitions that included the Indexed Annuity Leadership Council, Market Synergy Group, the American Council of Life Insurers, the National Association of Insurance and Financial Advisors, the Chamber of Commerce of the United States, the Financial Services Institute, among others.

Leaders from a number of these organizations issued a statement saying,

“…Contrary to the good intentions of Congress, the Department of Labor has stepped in front of the SEC by crafting an overly-complex and costly rule that presents sweeping consequences for millions saving for retirement. The rule is 1,023 pages long and shackles firms and their financial professionals with a byzantine compliance scheme and constant legal liability by moving regulatory and enforcement power to the courts. This will lead to inconsistent interpretations of the rule, confusion for advisors and financial institutions, and firms in some cases being forced to curtail their services…”[ii]

Others will take a more friendly approach of encouraging the DOL to reconsider and change certain elements of the rule.

So, just when plan sponsors began to understand the boundaries of fiduciary responsibilities and the opportunities for participant education, uncertainty has once again claimed the day.

The financial industry is likely to be in the state of uncertainty that comes with protracted lawsuits for some time. During the next few years, we may see aspects of the DOL’s Final Rule upheld, dismissed, or interpreted by courts and then sustained or overturned by other courts.

Unfortunately, it may be some time before we have clarity on the issue.

Terry Dunne is Senior Vice President and Managing Director of Rollover Solutions Group at Millennium Trust Company, LLC. Mr. Dunne has over 35 years of extensive consulting experience in the financial services industry. Millennium Trust Company, LLC acts as a directed custodian, and does not provide tax, legal, or investment advice.


[i] Mercer, Fiduciary Investment Advice: Implications for Retirement Plan Sponsors, May 19, 2016 [http://www.mercer.com/content/dam/mercer/attachments/global/webcasts/new-fiduciary-advice-rules-webcast-deck-mercer.pdf]

[ii] Dallas Business Journal, Guest commentary: Defending retirement security and choice, June 10, 2016. [http://www.bizjournals.com/dallas/news/2016/06/10/guest-commentary-defending-retirement-security-and.html?ana=bbg]

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