On Wednesday, February 9, a Texas federal judge upheld the U.S. Department of Labor’s (DOL) controversial fiduciary rule for retirement investment advisers — just hours after the agency had asked to stay the case in light of President Donald Trump’s directive to it on February 3rd to conduct an “economic and legal analysis” of the rule’s potential impact, and possibly rescind the proposed rule.  In upholding the rule, Judge Barbara M.G. Lynn found that the DOL did not exceed its authority and properly considered the costs and benefits when promulgating its new rule.

Barring further action, the DOL Fiduciary Rule is scheduled to be phased in over the course of 2017.  It revises the definition of “investment advice fiduciary” under the Employee Retirement Income Security Act of 1974 (ERISA), and requires financial professionals who advise retirement account holders to act in the best interests of their clients when recommending investment products, a higher standard than the current approach of requiring advisers to promote products that are merely suitable to an investor.  This regulation will automatically elevate all financial professionals who work with retirement plans or provide retirement planning advice to the level of a fiduciary, bound legally and ethically to meet the standards of that status. Although the new rule is likely to have at least some impact on all financial advisers, it is expected that those who work on commission, such as investment brokers and insurance agents, will be impacted the most.  Fiduciary responsibility is a much higher level of accountability than the suitability standard previously required of financial salespersons, such as brokers, planners and insurance agents, who work with retirement plans and accounts. “Suitability” meant that so long as an investment recommendation met a client’s defined need and objective, it was deemed appropriate. Now, financial professionals are legally obligated to put their client’s best interests first, rather than simply finding “suitable” investments. The new rule could therefore eliminate, or substantial curtail, many commission structures that apply within the industry.

Advisers who wish to continue working on commission will be required to provide clients with a disclosure agreement, called a Best Interest Contract Exemption (BICE), in circumstances where a conflict of interest could exist (such as the adviser receiving a higher commission or special bonus for selling a certain product).  This is to guarantee that the adviser is working unconditionally in the best interest of the client.  All compensation that is paid to the fiduciary must be clearly spelled out as well.

What’s covered:

  • Defined-contribution plans: four types of 401(k) plans, 403(b) plans, employee stock ownership plans, Simplified Employee Pension (SEP) plans and savings incentive match plans (simple IRA)
  • Defined-benefit plans: pension plans or those that promises a certain payment to the participant as defined by the plan document
  • Individual Retirement Accounts (IRAs)

What isn’t covered:

  • If a customer calls a financial advisor and requests a specific product or investment, that does not constitute advice.
  • Financial advisors can provide education to clients, such as general investment advice.
  • Accounts funded with “after tax” dollars not considered retirement plans.

The word on the street is that the Trump administration will need to build a robust administrative record if it wants to convince the public and courts a full-scale repeal of the new fiduciary rule for retirement account advisers is justified and not merely a political about-face.  Although the DOL appears certain to delay the rule’s initial implementation date, currently set for April 10, in light of the review the President requested last week, experts suggest that the agency will have a tough time justifying changes after now three federal judges independently have found its original analysis robust enough to withstand scrutiny.