I’m that guy who loves details and actually reads things like the Fiduciary rule changes coming in April 2017. But, the 70 pages I just read have just been put on hold by President Trump (the article was written in election season). But, the industry leaders and bankers have acknowledged they may impose the spirit of the regulations.
I write my notes below knowing much of this or all of it may be deleted. So, stay tuned for more.
Breaking Fiduciary rules puts people in jail. Cool? Well, not so much. The rules have been revised, here’s the DOL statement about the new rules coming April 2017:
“Non-fiduciaries may give imprudent and disloyal advice; steer plans and IRA owners to investments based on their own, rather than their customers’ financial interests; and act on conflicts of interest in ways that would be prohibited if the same persons were fiduciaries. In light of the breadth and intent of ERISA and the Code’s statutory definition, the growth of participant- directed investment arrangements and IRAs, and the need for plans and IRA owners to seek out and rely on sophisticated financial advisers to make critical investment decisions in an increasingly complex financial marketplace, the Department believes it is appropriate to revisit its 1975 regulatory definition as well as the Code’s virtually identical regulation. With this regulatory action, the Department will replace the 1975 regulations with a definition of fiduciary investment advice that better reflects the broad scope of the statutory text and its purposes and better protects plans, participants, beneficiaries, and IRA owners from conflicts of interest, imprudence, and disloyalty.” DOL Fiduciary Final Rule, 4-8-2016
These are the upfront discussions the DOL has with its audience, and I like it. Who would argue that investment advisors should be good and informative to their customers? I think ethical advisors is a good idea. Ethics has been taught for centuries, it’s the intersection of good for you and good for your customer, it’s virtue in action, it’s how economies thrive or fail.
But, my reading of this mega-bill to regulate the human behavior of salespeople, the initial introduction by the DOL, the first 10 pages says, fiduciary types, like investment advisors, should be nice to their customers. What a grand idea. Who would argue. The remaining 70 pages are about the exceptions for investment advisors and fiduciaries to escape being nice. Say what? Did I spend time reading 60 pages of exceptions?
As I read the exceptions, it is evident lobbyists efforts were successful in turning an otherwise good idea of looking out for customers (the public) into self-serving “loop-holes.”
If I could get this to President-elect Trump, I’d ask him to eliminate all the exceptions and make financial advisors live with being good to their customers.
A key element of the new rules is the 2015 proposed language that has lingered and found their way into the Final regulations. That is, the phrase “carve-outs” was intended to remove from a fiduciary anything that was not considered “recommendation.” Carve-Outs were exceptions to the be nice to your customer idea.
For example, a newsletter published by an investment firm is by the new rules a “CARVE-OUT” which means the rules don’t apply. The publisher and author (commonly a sales person) does not have to be nice to customers. Or, you could say, the rules of being nice don’t apply to what an advisor (salesperson) writes in a newsletter. What? Why would the DOL write 70 pages but 60 of them are exceptions like this? Well, why do you think this happens?
There are many other exceptions. In real life, this means an unsuspecting business owner who may rely on a salesperson may not be aware that these new regulations intended to protect him/her by design do not protect him/her. Everything a salesperson says is covered as a fiduciary unless it is an exception. There are 60 pages of exceptions. So, an unsuspecting business owner needs to know when they can trust the salesperson? there is no way an owner will understand the hundreds of exceptions written on those 60 pages of exceptions. They will continue to believe, and trust, and expect the salesperson is telling the the truth, and doing what’s in their interest.
The DOL in the regulation points to an example of what’s wrong with the “carve-out” idea:
“platform providers are substantially more likely to add their own funds to the menu, and the probability of adding a proprietary fund is less sensitive to performance than the probability of adding a non- proprietary fund.” DOL Fiduciary Final Rule, 4-8-2016
There’s a sales game emerging that makes this fiduciary change even worst. The rule introduces three different levels of fiduciary trust. To simplify and regulate trust there’s just more confusion. Salespeople and companies can present themselves as able to replace “fiduciary” duties of a plan sponsor. But, wait, hold on. Not so fast. Owners are cautioned and advised to understand their responsibilities increase under this law’s rules. The law increases the ultimate penalties to business owners and at the same time expand what an owner must know. And, at the same time give advisors and companies more places to “hide” behind the law.
If you can’t tell already, if you’re still reading, I’m not a fan of this new clarifying regulation. The reason it was in discussion for so long (as far back as 1990) is because it’s very difficult to regulate trust. But, the end result in this one is to give 60 pages of exceptions to professionals and more liability to owners.
Those responsible for being the experts are exempt in many cases because of the new regulations. But, the law, sadly, provides many exemptions.
PRACTICAL APPLICATION FOR SINGLE EMPLOYERS AND WHAT YOU SHOULD DO:
An easy test is to separate any product sale from any advice. Conflict of interest always gives way to opportunities to deceive. Run from a salesperson, company or provider who says they can be fiduciary and sell a product. At best they’re well-intentioned, at worse they’re hiding behind the exception built into the new rule, but won’t tell you that.
The fact is, a plan sponsor can not, and should not, consider themselves able to give their fiduciary duties away.
When fiduciaries violate ERISA’s fiduciary duties or the prohibited transaction rules, they may be held personally liable for any losses to the investor resulting from the breach. Violations of the prohibited transaction rules are subject to excise taxes under the Code or civil penalties under ERISA.
Open MEP SPONSORS, PEO’S
The concerns addressed by the advisory council in their letter to the DOL chief included discussion about the growing use and benefits of the PEO and Open MEP arrangements. Sadly, the final regulations do not address these concerns at all. PEO’s and adopting employers must act in the highest regard for their covered members ensuring no conflicts of interest exist, that policy, roles and procedures clearly define each providers role.
To reduce a businesses obligation for mistakes and errors in managing their employee’s participation in their 401k a well run PEO can facilitate all aspects of the 401k. The employer by moving into the co-employment relationship is asking for the professional management they want. The employer must receive from the PEO the definition and roles associated with a properly run retirement plan. This means each person’s roles and responsibilities must be explained as part of the contract and the role of the employer must be limited. Look for a declaration about this.
Probably best to stay simple when it comes to marketing materials. Anyone who handles the money of another should do so keeping their hands out of the cookie jar. It’s not amazing that human behavior is predictable. The best organizations and the ones to hire to help you with your retirement or health & welfare plan is the one who is independent.
Federal register, April 8, 2016, Vol 81, No 68, (also highlighted in the attached; fiduciary-dol-final-rule-federal-register-publication-4-8-2016 )
SEC RFP article and useful tips, (rfp-sec-gov-selecting-and-monitoring-pension-consultants-tips-for-plan-fiduciaries)