Insight

On April 14, 2015, the Department of Labor (DOL) issued new proposed regulations to change the definition of a fiduciary under the Employee Retirement Income Security Act (ERISA). The purpose is to protect investors from what they call “conflicted investment advice.” In a nutshell, the DOL wants to require any advisor providing advice to a 401(k) plan sponsor or participant to act in the best interest of the client.

It certainly sounds reasonable, and it is definitely long overdue. The problem is that for years, many brokers and insurance agents have been providing services to 401(k) plans without having to act in the client’s best interest. Under the Financial Industry Regulatory Authority (FINRA), brokers have only been required to act under a ‘Suitability’ rule—meaning they just had to determine if the potential investment was suitable for the client. This environment, in which brokers can operate, has created significant potential for conflicts of interest.

If your non-fiduciary broker is given a choice of recommending multiple suitable investment options, they may choose to guide their clients to an investment based solely on their potential commission, instead of selecting an investment that provides the most value to the client. This is called “variable compensation.” And many insurance agents are not even licensed, which means they can’t provide investment recommendations or advice.

So, for many years plan sponsors who hired a broker or insurance agent to be the plan’s advisor have been putting the plan and participants at risk as the service provider offered no fiduciary obligation or protection.

However, another group of financial service providers, called Registered Investment Advisors (RIAs), are required under the Securities and Exchange Commission (SEC) to act in a fiduciary capacity. Thus, an RIA who is a named fiduciary to a 401(k) plan MUST give advice and/or management only in the benefit of their client and CANNOT receive different amounts of compensation based on their advice.

The proposed DOL regulations would finally deem anyone providing advice to a 401(k) plan to be a fiduciary. And, it would require brokers receiving variable compensation or commissions to enter into a contract with the client stating that they will be “acting in the best interest of the client.”

Understanding this rule change and its effect on you and your company’s 401(k) plan depends mostly on what type of advisor you currently work with. If you are already working with an RIA (or, named plan fiduciary), the new proposed regulations will not affect you at all as this advisor is already acting as a fiduciary and providing you the services and protection you should expect.

At the moment, these are proposed regulations, and will move into a 75-day comment period, followed by an administrative hearing by the DOL within 30 days following the comment period. Continue to visit our website or follow us on LinkedIn to learn more on these developments as they unfold.