The Labor Department will more than likely propose fundamental changes to the fiduciary rule and its prohibited transaction exemptions, resulting in a delay of full implementation of the controversial regulation for at least one year, and perhaps longer, according to attorneys with Drinker Biddle & Reath.

Proposed revisions to the rule will be subject to public comment and other administrative requirements, as the DOL is committed to strictly following the letter of the law to avoid legal challenges, explained attorneys from the firm during a recent webinar.

While both a delay of the January 1, 2018 full implementation date and revisions to the rule would be welcomed by stakeholders who view the existing regulation as onerous, the attorneys cautioned that brokers and advisors to 401(k) plans face key compliance requirements under the existing transition period for the rule, which began June 9.

Specifically, brokers who have been advising 401(k) plans as non-fiduciaries are required to amend 408(b)(2) fee disclosure requirements by August 7 of this year.

Under the 408(b)(2) reg, which Labor issued in 2012 as a way to assist plan sponsors in complying with their fiduciary duties under the Employee Retirement Income Security Act, plan service providers are required to disclose their “status”—whether or not they are serving in a fiduciary capacity.

“For the most part, broker-dealers, and insurance agents and brokers, have taken the position that they were not fiduciaries and therefore did not make the fiduciary disclosure,” wrote Fred Reish, chair of the financial services ERISA team at Drinker Biddle, in a recent blog post.

But under the fiduciary rule’s impartial conduct standard, which went into effect on June 9, advisors to plans with less than $50 million in assets are required to serve as fiduciaries, and adhere to the impartial conduct standards’ requirement to give advice in a plan’s best interest.

“Under the new rules it’s hard for an adviser to work with a plan without being a fiduciary,” wrote Reish.

The 408(b)(2) disclosure requires plan providers to communicate changes in their fees or status within 60 days of the change of services, which puts the deadline at August 7, if counted from June 9, when the impartial conduct standards took affect.

A failure to amend the proposals would make any compensation paid to brokers or advisors prohibited.

408(b)(2) separate from rule, but impacted by it

Plan advisors, whether fiduciaries before June 9 or not, have been feverishly preparing to comply with the fiduciary rule.

The disclosure requirements under 408(b)(2) are wholly separate from the rule itself, though clearly impacted by it.

Reish fears many broker-dealers are not connecting the dots, given their focus on compliance with the rule and its exemptions.

“I know that I have educated a number of my broker-dealer clients about that requirement,” Reish said in an email. “I believe that, but for that education, some of them would not have become aware of it.”

The fee and status disclosure requirements under 408(b)(2) only apply to advice on defined contribution plans—they are not required when advising IRAs in the retail market, underscored Reish.

“These are separate sets of rules and the fiduciary regulation and exemptions do not address 408(b)(2),” added Reish. “A service provider has to make that connection upon becoming a fiduciary. The focus on complying with the fiduciary rule does not necessarily lead to the 408(b)(2) disclosure rules.”

Reish fears that a significant number of broker-dealers—particularly smaller ones—will inadvertently fail to make the required disclosure of their change in fiduciary status.

While the Labor Department has said that it will delay enforcing the best interest standard during the rule’s transition period, so long as providers are making a good-faith effort to comply, regulators have not said that easement extends to 408(b)(2) requirements.

Other considerations for plan sponsors

According to Bradford Campbell, a partner with Drinker Biddle, fiduciary advisors to 401(k) plans will in many cases need to rely on the rule’s Best Interest Contract Exemption, which includes a series of extensive, new disclosure requirements for accepting variable compensation and selling proprietary mutual funds.

That places a new burden on sponsors, says Campbell. “They will have to know every conflict of interest.”

As fiduciaries, sponsors will need to know if their plan advisor is deploying the BIC Exemption, and whether the conditions of the BIC are enough to satisfy both the investment needs of plan participants, and the sponsors’ own long-standing fiduciary requirements under ERISA.

“That means there have to be some tough questions asked” on the part of sponsors, Campbell said. “This rule is a triggering event for taking another look at existing arrangements.”

The impartial conduct standards have also changed how record-keepers service plans, and the scope of communications call-center agents are allowed to have with plan participants.

Those changes may require new service agreements with record-keepers, as well as with plan advisors. “Sponsors will want to have something on file that shows you considered the changes,” said Campbell.

Under ERISA, sponsors are required to monitor plan providers. One action attorneys say plan sponsors can take to assure they are satisfying their monitoring requirement is to issue requests for proposals with some regularity. In fact, the failure to issue RFPs has been cited as evidence of fiduciary breach in several lawsuits against 401(k) sponsors.

Now that the fiduciary rule’s impartial conduct standards have been implemented, sponsors may want to consider if now is the time to issue an RFP, said Campbell.

Instant Insights /

Despite possible fiduciary delay, important compliance requirements remain

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