Is This The End Of The Fiduciary Rule? And Will It Matter?
It finally happened. After months of speculation and weeks of rumors about what the Trump administration was going to do, on Friday President Trump signed an executive order which directed the Department of Labor (DOL) to reevaluate the Fiduciary Rule (the “Rule”). An anticipated six-month delay of the April 10 effective date of the Rule was not included in the final order, making its initial impact less than clear, but here’s what we know and can make an educated guess about.
The Rule Couldn’t Just Be Repealed. Although the initial compliance date is April 10, the Rule was finalized too early to be simply revoked under the Administrative Procedures Act.
The Language in the Order Suggests that the Rule will be History. The DOL is directed to study the Rule, looking at factors including whether it would increase fees for advice and increase litigation. These points were just lifted from the arguments opponents of the Rule have been making all along, and it is reasonable to conclude that a Trump-appointed DOL study will conclude that the Rule is objectionable for the reasons stated in the order. Speculation is that one part of the Rule that may survive is the provision requiring advisers who recommend rollovers to participants receiving distributions to put the participant’s interest first. This has been an area of abuse.
It will be counterproductive if the baby is thrown out with the bath water in a total repeal of the Rule, as the earlier regulations date back to 1975 and badly need updating to reflect the new world in which 401ks have become everyone’s primary retirement vehicle. The Fiduciary Rule emerged after a great deal of input from the financial services industry and a great deal of thought by the regulators. However, it could happen.
The Department of Labor Can’t Just Issue a Replacement Rule. An impact study and hearings will be required for a new proposal. Any new proposal could be completely watered down, such as merely requiring disclosure of potential conflicts, or (though I think this is unlikely) it might just eliminate the most criticized parts of the Rule, such as the Best Interest Contract Exemption. Under the circumstances, the DOL should delay the Rule on its own to end uncertainty about what is required on April 10.
Litigation May Reach a Standstill. The Fiduciary Rule has already been upheld in several federal courts, including in a decision in Texas on February 8 that was issued despite a Department of Justice request that the decision be delayed. It was expected that the Order would direct the Department of Labor to stop defending the Rule in court, but the final Order did not contain that language. Rather than risk more adverse decisions, the Department of Labor will probably still stop doing so and continue to argue that the suits should be stayed pending reevaluation of the Rule.
Financial organizations will have to decide whether they will adhere to a fiduciary standard. Some had already announced that they would follow it. Customer relations may require advisers who announced that they would be fiduciaries to continue to follow a standard that puts the customer’s interests first. At least some executives were quoted in a January 24 ThinkAdvisor article as stating that the fiduciary standard was here to stay and they would comply regardless of whether the Rule is repealed. Commission-based compensation is on the wane, and level fee arrangements, which were another way affected parties were complying, may be an idea whose time has come.
Plan sponsors and plan committee members have it easier. They already have the ability to hire advisers who adhere to an ERISA fiduciary standard, regardless of what the law requires, and they should do so. They can also negotiate arrangements with their non-fiduciary service providers to mitigate conflicts.
The real losers here are the IRA holders, who often do not have any investment expertise or any bargaining power when dealing with advisers. By and large, they aren’t able to get unconflicted advice from their advisers under the current rules. And it is ironic that these are many of the people whose support helped put the current administration in office.
By Carol Buckmann, JD
Guest author Carol Buckmann is a partner at Cohen & Buckmann PC, and has practiced at major law firms specializing in the areas of employee benefits and executive compensation for over 30 years. She has worked extensively in all areas of employee benefits, including fiduciary advice, tax qualified and non-qualified plans, welfare plans, ESOPs, employee benefit issues in mergers and acquisitions, and ERISA issues arising in investment fund formation. Carol frequently blogs, writes articles and is quoted in the media about current employee benefit issues.