Last month, the U.S. Department of Labor, after six years of review, issued its final rule aimed at ensuring that financial advisers who give investment advice to pension plans and their participants act in their clients’ best interest. According to the White House Council of Economic Advisers, investment advisers’ conflicts of interest diminish the performance of pension plans. On average, such conflicts cause 1% lower annual returns and $17 billion in losses every year for America’s families. To prevent the ill effects of “conflicted” advice, the new rule does the following:
- The rule expands the coverage of the “fiduciary” duty standard imposed by the federal Employee Retirement Income Security Act, known as ERISA. Under the rule, any individual who receives compensation for giving investment advice that is individualized or specifically directed to a particular pension plan sponsor, plan or participant is a fiduciary. For the first time, those who give retirement investment advice to IRA owners, including pension account holders who roll over their savings into an IRA from a 401(k), are covered. Retirement investment advisers will have to provide impartial investment advice in their clients’ best interest. They cannot accept payments that create a conflict of interest unless they use an exemption designed to ensure the customer’s interests are protected.
- The rule clarifies what constitutes fiduciary advice. If an investment adviser communicates educational information, that is not included in the definition of retirement investment advice subject to ERISA’s fiduciary duty standard. Nor would communications that a reasonable person would not view as investment advice, such as newsletters, television, radio and public media talk show commentary. Neither would a recommendation that a customer hire a particular investment adviser to render advisory or asset management services.
- The rule will allow firms to charge customary types of compensation, such as commissions and revenue sharing payments, under the best interest contract (BIC) exemption provided they commit to acting in their clients’ best interest. The commitment will require an investment adviser firm to charge only reasonable compensation, to avoid misleading statements about fees and conflicts of interest and to prohibit financial incentives that could cause advisers to act contrary to the client’s best interest. A firm must direct each client to a webpage that discloses the firm’s compensation policies and informs clients of their right to complete information on the firm’s fees.
In response to complaints from industry representatives, the final rule extends the “phase in” period for implementation of the rule’s retirement investor protections and exemptions. The rule will not require compliance until April 2017, when the broader definition of fiduciary will take effect. A firm will only have to comply with limited conditions to qualify for the BIC exemption until January 1, 2018, when the other requirements of the exemption become effective.
Investment firms and the pension plans and participants they advise should review with their legal adviser the requirements and benefits of the final rule now so they are ready to comply with their obligations or insist on their rights when the new rule goes into effect next April.
ABOUT THEODORE P. STEIN
Theodore P. Stein is an attorney based in Bethesda with more than 30 years of experience who counsels employers, their plans and plan trustees on how to comply with ERISA and the ACA and how to minimize the risk of ERISA claims. He also represents them when litigation is threatened or filed. He is the Chair of the ERISA/Employee Benefits Practice and a Principal in the firm’s Labor and Employment Practice Group.
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