What the Final Fiduciary Rule Means

It was a lengthy odyssey, to say the least, but on April 6 the Department of Labor (DOL) issued the final version of the much-discussed fiduciary regulation. It will have a big impact — and 403(b) advisors are among those who have much to digest regarding its implementation and import. Accordingly, Chris DeGrassi, Executive Director, NTSA; and Sue Diehl, QPA, CPC, President, PenServ Plan Services, spoke about it in an April 13 NTSA webcast.

In “The Final DOL Fiduciary Regulation: What’s New and What Does it Mean for 403(b) Advisors,” DeGrassi and Diehl boil down the rule’s most important impact for purposes of NTSA members. Highlights include the following.

The rule:

• redefines “broadens activities” that constitute fiduciary advice;

• applies to IRAs; and

• creates new and changes to existing prohibited transaction exemptions.

You are a fiduciary if you make a recommendation regarding a covered plan and you receive compensation in connection with the recommendation. A recommendation is:

• advice to buy, sell or hold property in a covered plan;

• directed to an individual; and

• a suggestion that a reasonable person would consider to be advice to an individual.

Accounts the new regulation covers include the following:

• all employer plans subject to Title I of ERISA; and

• all plans otherwise included in Internal Revenue Code Section 4975, such as IRAs, health savings accounts, Coverdells, SEPs, SIMPLE IRAs and Keoghs.

Accounts the new regulation does not cover include the following:

• non-qualified investment or brokerage accounts; and

• retirement plans exempt from Title I of ERISA and/or Code Section 4975, such as governmental 403(b) and 457 accounts.

Fiduciary duty under the new regulation means that one must:

• act prudently in the best interest of the participant, including the knowledgeable person standard;

• act without conflict of interest and not engage in prohibited transactions; and

• not receive more than reasonable compensation.

Examples of conflict of interest under the regulation include:

• related parties;

• personal or financial interests; and

• prohibited compensation that varies by investment recommended and is paid by a third party.

Prohibited compensation includes:

• commissions;

• 12b1 fess and revenue sharing; and

• other third-party payments.

Being a fiduciary does not mean:

• that you can’t be paid;

• you must pick the best investment; and

• you have an explicit required duty to monitor.

Prohibited Transaction Exemption (PTE)

One might need a PTE if one receives any third-party compensation or receives any variable compensation. The PTE 84-24 requirements include the following:

• Must comply with fiduciary standard: must in the client’s best interest, there must be no misleading statements, and there must be reasonable compensation.

• There must be disclosure of fiduciary status, fees and charges, and compensation stated in dollars.

• Disclosure must be signed before the transaction and be retained for six years.

Best Interest Contract Exemption

The best interest contract exemption permits forms of prohibited compensation if certain conditions are met regarding variable compensation, commissions and third-party compensation. But it does not allow one to provide:

• any incentives that would cause an advisor to act other than in a client’s best interest; or

• non-cash compensation.

Applicability

“Write down the date April 10, 2017. That’s when you are subject to a fiduciary standard,” DeGrassi cautioned. As of that date, the fiduciary standard applies to all IRAs and all recommendations are subject to the fiduciary standard regarding impartial conduct and prudence.

Remember!

Remember that the DOL will be watching, especially with regard to rollovers, reverse churning and annuity sales. “They’re going to look at annuity sales with a laser eye,” DeGrassi remarked.

“Bottom line,” DeGrassi said, “Be prepared to have documentation to prove why a transaction was in the client’s best interest.”