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The new rules are intended to cut individuals’ retirement account fees and will require financial advisors to have fiduciary status to manage these accounts.


Fiduciary Rules for Retirement Account Management Moving Forward

  • John Stiglich
  • 1/16/2017

Update: 6/2/17
On May 22, 2017, the Department of Labor (DOL) announced that the new fiduciary rule will largely go into effect on June 9, 2017. This means that anyone who provides investment advice to a retirement plan, retirement plan participant, or an IRA account holder, and is compensated directly or indirectly will be a fiduciary and will need to comply with the fiduciary duties under ERISA. In addition, anyone who provides advice to someone regarding distributions and rollovers or who to hire as an investment advisor, and is paid directly or indirectly for that advice, will now be classified as a fiduciary under the new rules.

The original rule dealing with prohibited transaction exemptions under what was termed a “Best Interest Contract Exemption” (BICE) was always scheduled to go into effect on January 1, 2018. However, in the interim, these advisors must adhere to what is termed “impartial conduct standards.” Those standards require that the financial advisor (a) act in his or her clients’ best interest and comply with ERISA’s prudence requirements, (b) accept only reasonable compensation, and (c) not make any misleading statements.

The DOL has also announced that they will relax enforcement of these rules during the transition period and focus their efforts on educating and guiding financial advisors on how to adhere to these new regulations. Finally, the DOL has made it clear that it has not completed its review of the regulations in accordance with President Trump’s Executive Order. Therefore, further changes and/or delays could occur prior to January 1, 2018.

On April 10, 2016, the Department of Labor published the final rules in the Federal Register for financial institutions and investment advisors working with client retirement accounts. The new rules require financial advisors to act as fiduciaries to manage retirement accounts and IRAs, and work to limit participants’ fees for the management of these accounts.

Watch our webinar to learn how the rules might be applied to organizations, and the risks associated with them.

The rules are scheduled to become effective on April 10, 2017, and have sparked a lot of controversy between Obama’s administration and financial service firms. Several lawsuits over the rules are still pending, and a two-year implementation delay has been discussed under Trump’s administration. However, as the effective date approaches, financial service firms should work under the premise that the new fiduciary rules will take effect in April.

Investment advisors will take on additional risk

While the new rules are complex, two significant changes stand out. First, the new fiduciary standard now applies to any type of IRA account. Prior to these new rules, the Department of Labor only focused on employer-sponsored retirement plans. Second, any advisor or financial institution working with a client who is a participant in a retirement plan or has an individual retirement account (IRA) would be held to the status of a fiduciary. This is a significant change for the investment advisor who worked as a broker on these types of accounts; instead of making sure an investment is “suitable” for a client, an advisor must meet the fiduciary standard of making sure that an investment is in the “best interest” of their client. If they fail to meet the fiduciary standard, they can be sued in a state court rather than going through arbitration.

The new Fiduciary Rules require fiduciary advisors to:

  • Give advice that is in the “best interest” of the retirement investor. This best interest standard has two chief components:  
    • Under the prudence standard, advice must meet a professional standard of care as specified in the text of the Best Interest Contract Exception (BICE)
    • Under the loyalty standard, advice must be based on the interests of the customer, rather than the competing financial interest of the advisor or firm
  • Charge no more than reasonable compensation  
  • Make no misleading statements about investment transactions, compensation, and conflicts of interest

New rules redefine fiduciary activities

The new fiduciary rules not only hold each investment advisor to the status of a fiduciary, but they also define fiduciary activities beyond just the sale or advice on investments. For example, under these new rules, assisting a retirement plan participant with the decision to either roll money from another retirement plan account or IRA into an existing retirement plan account or roll it out into an IRA is considered a fiduciary act. Anyone who provides this type of advice to a plan participant, and receives any form of direct or indirect compensation for doing so, must document all of the facts upon which the decision was made. The plan participant must also sign-off their acknowledgement of those facts and the recommended conclusion. This requires the advisor to gather the details relevant to the costs and service structure of the existing account and compare them to the costs and service structure related to the suggested account.

Advisors will service IRAs through Best Interest Contract Exception

IRA accounts represent a significant portion of the future wealth of the individual owners when they retire. Obama’s administration and the Department of Labor have taken a position that many of these retirement accounts are being “eaten away” by excessive fees charged by investment advisors hired by the account holders to manage the accounts.

In 2012, significant new fee disclosure rules for qualified retirement plans were implemented. The new fiduciary rules add IRAs to the list of covered accounts, and financial advisors will only be able to continue to serve many of these retirement accounts through the BICE.

Participant fees move from commission-based to asset-based

Because of the impending rules, many major investment firms have decided to completely change the manner in which they handle retirement accounts and IRAs, including SEPs and SIMPLEs. They are requiring their brokers to move accounts from a “brokerage” platform to a “managed” platform. This means the fee income on these accounts will go from a commission-based fee to an asset-based fee, and brokers will be required to acquire the appropriate licensing to service the accounts as a fee-based advisor.

Not all investment firms are moving to the fee-based model; some are allowing their brokers to service clients’ accounts using a commissioned-based model, but in so doing require the brokers to strictly adhere to BICE. This will not be easy for brokers with a large volume of accounts, especially smaller accounts.

The other option for fee-based models is the “robo advisor,” which is gaining popularity for smaller accounts. These web-based account advisors take personal data from a questionnaire completed by the investor and uses computer software to develop a portfolio for the investor’s account. The annual fees are typically lower than most managed account solutions, but there is little or no human intervention.

Some small accounts may be grandfathered

“Grandfathering” provisions will allow some small accounts to remain in their current status as a brokerage-based account as long as no new money is added. If the investor decides they want to add money to one of these accounts, a new fee-based account will have to be established.

Individuals and institutions should prepare for change

The new rules will have a significant impact on the way that investment advisors handle retirement plan accounts and IRAs, and anyone who has retirement plan accounts and IRAs will most likely see changes in the manner in which their accounts are handled. Only time will tell whether these new rules reduce the fees charged on retirement accounts and IRAs, and whether they increase the accountability of financial advisors to better manage these accounts.

  • John Stiglich
  • Principal
  • CLA Joliet
  • CliftonLarsonAllen Wealth Advisors, LLC