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DOL Fiduciary Rule
Breaking Down the Fiduciary Rule, Part Three: Why Are These Changes Being Made?

Breaking Down the Fiduciary Rule, Part Three: Why Are These Changes Being Made?

The following is the third in a five-part series exploring the U.S. Department of Labor’s final fiduciary rule.

Last month, the Department of Labor released its final rule regarding an amended definition of a fiduciary on retirement accounts under the Employee Retirement Income Security Act of 1974 (ERISA). This proposal, often called the “Conflict of Interest Rule” was initially proposed in 2010, but was withdrawn for further analysis after numerous industry groups and members of Congress from both political parties objected.

On April 14, 2015, President Obama asked the Department of Labor to re-examine the proposal. Over 3500 comment letters were examined by the Department before the final rule was sent to the Office of Management of Budget (OMB) in January 2016, with the final rule being published on April 6, 2016. Full compliance with the rule is expected by the Labor Department within eight months, with full implementation of the rules in one year.

Reaction to the rules changes, perhaps the most significant change to ERISA since its initial passing, have been mixed, but the Labor Department has been assuring the financial services community that it carefully considered the comment letters it received in order to address the concerns from its original 2010 proposal.

The Labor Department’s Fiduciary Rule, also called the conflict-of-interest rule, was designed to prevent backdoor payments and hidden fees that cost employer-sponsored retirement account holders an average of $17 billion per year as previously mentioned. Added up over the average length of retirement savings, these fees would reduce average holdings by nearly one quarter. The conflict-of-interest at the heart of the rule change is not one that has impacted regular investment accounts which under the purview of FINRA and the SEC.

Only employer-sponsored retirement accounts such as 401(k)s, defined benefit plans and certain types of Simple IRAs are subject to the rules change, since these types of accounts have been under the authority of the Labor Department since the Employee Retirement Income Security Act (ERISA) was signed into law in 1974.  All other types of investment accounts, including Traditional and Roth IRAs, are still subject to the rules set in place by the Investment Advisors Act of 1940.

When the original version of the fiduciary rule was published by the Department of Labor in 2010, it was widely criticized by financial professionals and registered investment advisors (RIAs), who worried that it would not be possible to sell proprietary products at all or certain alternative investment products like non-traded real estate investment trusts (REITs) and small business development companies.

In the final rule released last month, the Labor Department made specific changes to ensure these types of alternative investments will be able to be purchased for all retirement accounts, so long as the same conditions applying to other investments using the fiduciary standard are met.

Another significant change from the original 2010 proposal to the final rule are “investment educational activities” that fall short of fiduciary actions. There was a minor furor from television personalities, newsletters, research publishers and other publications written for a general audience fearing that they might be put out of business under the new rules. This article would be an example of a publication written for a general audience. The Labor Department was quick to point out that was not the case when releasing its updated rule.

The final changes expand on these concerns and many related to them, eliminating fiduciary responsibility for communications of any kind that a “reasonable person would not view as an investment recommendation,” according to the Labor Department’s Fact Sheet. In addition to publications for general audiences, the Labor Department mentioned speeches and conferences that are “widely attended,” general marketing materials and general market-related data. Appraisals will not be considered advice at this time, but will be “reserved for future rulemaking.”

Another aspect of the final rules change deals with order-taking. If a client calls with a specific purchase request, without asking for any advice, the transaction does not constitute investment advice and is not subject to the fiduciary standard even if it is for an employer-sponsored retirement plan.


Ryan W. Smith is a relationship manager and writer at AdvisoryWorld. Prior to AdvisoryWorld, Ryan worked on the trading desk of a mid-sized brokerage firm in Des Moines, Iowa. He then earned his journalism degree and moved to Reuters America in New York where he covered structured finance debt markets. Ryan currently resides in San Diego, Calif. with his wife and son.

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