May 31, 2016
Recently, the Employee Benefits Security Administration of the Department of Labor (DOL) released a new rule assigning a fiduciary standard to retirement advisors. The rule heightens the duty of care for financial advisors who deal with retirement accounts, imposing a standard which expressly requires that the advisor acts in the client’s best interest.* This is a departure from the prior standard which required only that a broker’s recommendations to a client be “suitable.”
Under the new rule an advisor is defined as “any individual receiving compensation for providing advice that is individualized or specifically directed to a particular plan sponsor, which would include employer sponsored retirement plans. General education about retirement investments, however, is not considered “advice” under the new rule and does not trigger the higher fiduciary standard. The more tailored retirement information is to an individual client’s situation, the more likely it will be considered “advice” and held to fiduciary standards and accompanying liabilities.
Under the new rule, advisors and clients must enter into a Best Interest Contract (BIC) stating that the advisors will: 1) act in the client’s best interest when providing investment advice; 2) charge only reasonable compensation; 3) not mislead clients with regard to transactions or payment and 4) disclose any conflicts of interest.
The rule allows for certain exemptions and does not apply retroactively. As a general matter, however, any advisors who deal with retirement accounts—not just professional pension plan managers—are subject to this higher duty of care for clients under both the tax code and the Employee Retirement Income Security Act of 1974 (ERISA).
The rule will formally take effect on June 7, 2016; however, advisors have until January 1, 2018 to have the new contracts, forms and other documents as required in place.
* U.S. Department of Labor Employee Benefits Security Administration. “Fact Sheet: Department of Labor Proposes Rule to Address Conflicts of Interest in Retirement Advice, Saving Middle-Class Families Billions of Dollars Every Year.” Department of Labor. Web. Accessed May 31, 2016. https://www.dol.gov/ebsa/newsroom/fsconflictsofinterest.html
** Department of Labor, Employee Benefits Security Administration. Definition of the Term ‘‘Fiduciary’’; Conflict of Interest Rule—Retirement; Investment Advice; etc., 81 Fed. Reg. 68 (April 8, 2016). Federal Register: Rules and Regulations. Web. Accessed May 31, 2016. http://webapps.dol.gov/FederalRegister/PdfDisplay.aspx?DocId=28806