It’s Official—DOL Fiduciary Rule Vacated

The latest—and final—chapter of the Department of Labor (DOL) Conflict of Interest Rule (also known as the fiduciary rule) has been written. On June 21, 2018, the Fifth Circuit Court of Appeals upheld its May 2018 judgment and issued an official mandate to vacate the DOL’s fiduciary rule. This decision concluded the years-long narrative that gripped the financial services industry and provoked much conjecture and deliberation since being proposed in 2010 by the Obama administration.

The court’s decision, which the DOL declined to appeal, rested on the premise that the DOL did not possess the authority to redefine the definition of “fiduciary advice” under ERISA. This decision also covered the technical aspects of the rule, most notably the elimination of the Best Interest Contract (BIC) exemption. The BIC exemption would have allowed financial advisors to receive variable compensation (e.g., commissions) in return for providing investment advice on retirement accounts.

What does this decision mean for retirement plan sponsors?
The demise of the fiduciary rule still leaves some unanswered questions in its wake. For example, it is unclear if the rule’s eradication will restore prerule guidelines for financial advisors who provide investment advice to retirement plan sponsors and participants. Further, the SEC (the regulatory arm responsible for enforcing federal securities laws) has unveiled a proposal for its own best interest standard for broker/dealers and financial advisors. Indeed, industry experts suggest that the DOL and SEC will eventually harmonize their efforts and arrive at a newly defined fiduciary standard. In a post-fiduciary rule environment, financial services firms and financial advisors may revert to previous agreements or continue forward with policies that align with the fiduciary standard. Regardless of what course of action a service provider takes, plan sponsors—as fiduciaries themselves—are obligated to:

  • Familiarize themselves with the services and associated compensation that service providers and financial advisors receive
     
  • Ensure that compensation is reasonable
     
  • Document the measures taken to periodically assess service providers

As always, retirement plan sponsors should continue to heed best practices when appointing and assessing third parties to work on their retirement plans or with their employees, as well as seek assistance from qualified experts if they do not possess the necessary expertise themselves. For plan sponsors who are unsure where to begin in this post-fiduciary rule environment, a good starting point is with their retirement plan advisors.