Fiduciary Rule Delay Comes With Its Own Set of Problems
August 22, 2017 by Melanie Waddell
While industry groups applaud the Labor Department’s recent decision to seek a delay of the January compliance date for its fiduciary rule by 18 months, they say such an extension comes with its own set of problems.
The ERISA Industry Committee told Labor in a Wednesday comment letter that while ERIC supports a delay, “uncertainty as to plan fiduciaries’ obligations to monitor service providers’ adherence to the rule has caused some plan fiduciaries to consider directing substantial resources toward compliance costs rather than toward providing benefits,” an outcome ERIC suspects is not consistent with the department’s intention in implementing the rule.
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The group, which advocates for large employers on health, retirement and compensation public policies, asked Labor for “clear guidance on how plan fiduciaries can satisfy this duty to monitor that will allow them to channel the appropriate resources needed, and not more, toward this monitoring obligation.”
Will Hansen, senior vice president of retirement policy for ERIC, told ThinkAdvisor on Thursday that Labor’s plan to extend the transition period from Jan. 1, 2018, to July 1, 2019, will also postpone additional guidance from Labor “on how a plan sponsor should properly monitor the fiduciary obligations of a recordkeeper that is now providing rollover and other investment advice to plan participants,” activities that prior to June 9, when the rule’s Impartial Conduct Standards kicked in, “were not necessarily deemed a fiduciary level event.”
Plan sponsors, Hansen said, want more guidance from Labor “on how to satisfy the new standards the rule [has] imposed on them with respect to monitoring activities of plan recordkeepers and other consultants.”
Beyond that guidance, ERIC asked that the department allow service providers to present an annual certification that they did not provide any fiduciary investment advice to plan participants in the past year; or an annual certification that they did so and that the advice satisfies all relevant fiduciary obligations.
Labor filed with the Office of Management and Budget on Aug. 9 to delay the January applicability date of its fiduciary rule by 18 months.
OMB has 90 days to review Labor’s request. Once approved, Labor’s proposal will be published in the Federal Register and public comments will be taken, likely for 15 days.
Under the delay plan, Labor submitted to OMB proposed amendments to three exemptions:
- The best-interest contract exemption, which opponents of the rule argued is the contract that would spark a slew of class-action lawsuits;
- Class exemption for principal transactions in certain assets between investment advice fiduciaries and employee benefit plans and IRAs; and
- Prohibited Transaction Exemption 84-24, which involves annuities.
The U.S. Chamber of Commerce, a staunch opponent of Labor’s fiduciary rule, also sent a comment letter to Labor voicing its concern about the scheduled implementation of the “full” BICE requirements in January, and the ongoing problems that will occur if compliance isn’t delayed.
By the department’s own calculations, implementation of the full BICE will impose “at least $550 million per year in additional compliance costs on broker-dealers who receive commissions for serving savers who make rollovers or new contributions to IRA accounts,” the Chamber wrote.
“These costs will inevitably be passed to retirement savings investors in the form of higher fees for advice and transaction services, and the result will be lower investment returns and lower ultimate retirement savings accumulations.”
While firms have taken steps to comply with the rule, “financial institutions are still concerned about future difficulties in complying with an enormously complex rule,” Chamber wrote, with the concerns “largely caused” by the “currently scheduled rapid end of the transition period” on Jan. 1 when the “unworkable BIC exemption and related PTE’s are set to take effect.”
An 18-month extension gives Labor “time to fix these unworkable requirements,” Chamber wrote.
The “stability provided by the proposed extension would make it easier for advisors to find optimal compliance solutions during the transition period that better balance the needs of retirement savers with the compliance obligations of their advisors.”
The Chamber also said that any revisions to the fiduciary rule should include the following:
- Sales activity with clear disclosure should not be fiduciary advice;
- The BICE should be replaced with a streamlined exemption modeled on the transition version of the BICE;
- The transition version of PTE 84-24 (the version adopted in 2006 with the addition of the Impartial Conduct Standards) should be the final version;
- “Roll-in” (plan-to-plan transfer) recommendations, and all contribution recommendations (whether and how much to contribute to a qualified plan or IRA) should not be fiduciary advice; and
- Recommendations to reinvest required minimum distribution proceeds should not be fiduciary advice.
