Five Fast Facts Regarding the New DOL Proposed Fiduciary Rule

The proposed rule is controversial, replacing a 2010 proposed rule that was withdrawn due to feedback from concerned industry groups. At 120 pages, much of which can be interpreted in various ways, the proposed rule is anything but light reading. However, some simple observations can be of benefit in determining the impact of the proposed rule on plan sponsors and the entities with whom they work.

 

There appears to be no need to take any immediate action. A proposed rule is just that; proposed. It is not final, nor will it be anytime soon. It appears that any final rule would not apply until late 2016 at the earliest, and it is already anticipated that certain industry groups will request an extension of the initial 75-day comment period. In addition, it is quite possible that there will be many changes between the proposed rule and the final rule once it is adopted. This is especially true as the previous proposed rule in this regard was withdrawn.

It appears that the proposed rule will NOT affect non-ERISA plans. Although the proposed rule expands the scope of fiduciary coverage to include IRAs, which are not subject to ERISA, at first glance, the scope does NOT extend to plans that are not subject to ERISA, such as church or governmental plans. Thus, those plan sponsors may not need to be concerned at all with the proposed rule, unless the plan’s service provider(s) also provide IRA services to plan participants (see below).

Conversely, IRAs appear to be significantly affected by the rules. The proposed rule extends ERISA-like fiduciary coverage to those who work with IRAs, who were not previously subject to such rules. There is an exemption from fiduciary coverage for IRA service providers, but the exemption, known as a “best interest contract exemption,” appears to be administratively cumbersome, especially with respect to IRA rollovers.

The proposed rule primarily affects service providers as opposed to plan sponsors. Though there are some aspects of the updated fiduciary definition which apply to plan sponsors, such as exemptions for certain employees, for most plan sponsors, the impact does not appear to be significant. Service providers, however, may need to change the way they do business with plan sponsors, which could have an indirect impact on such sponsors.

There are a lot of unknowns, at least at present. As is usually the case with significant and comprehensive guidance, there is a lot that is open to interpretation. For example, since the IRS is responsible for the enforcement of fiduciary rules as they apply to IRAs, how vigorously will an organization with limited resources enforce such rules? There are several such issues with the proposed rules, and, of course, the details of the rules are subject to change before finalization.