Fiduciary Rule Delay 'Too Late’ for Industry to Change Course
Despite President Donald Trump’s order today delaying implementation of the Department of Labor’s fiduciary rules — which were set to take effect April 10 — many in the industry say they are still moving forward with their plans to comply.
Industry insiders last week predicted that Trump would make it a priority to delay, modify or repeal the fiduciary rules but, in the meantime, most financial services companies have already committed the resources for compliance. Experts say they probably won’t stop what they are doing now, despite many having railed against the rules, saying they were onerous for companies to comply with and would limit the investment choices available to middle class and low-income retirement savers.
The 180-day postponement “directs the DOL to undertake an updated economic and legal analysis of the fiduciary rule, including analyzing potential harm to investors, disruptions within the retirement services industry, price increases to investors and increased litigation,” says Erin Sweeney, member at Miller & Chevalier, who was formerly with the Department of Labor. “The Trump administration further directs the DOL to analyze the related prohibited transaction exemptions, ‘especially the best interest contract exemption’ to determine if the exemptions ‘substantially undermine the rule’s effectiveness at achieving its intended goals.’”
In the past, only registered investment advisers were considered fiduciaries, meaning they must make decisions in the best interest of their clients. RIAs typically charge a flat fee for their services. But broker-dealers followed a suitability clause, meaning they could suggest investments, even ones that benefited them with higher fees, as long as it was in line with other similar investment options on the market.
With respect to ongoing litigation, Sweeney says she believes that the DOL and the Department of Justice will “quickly move to stay all outstanding litigation pending over the fiduciary rule” because Judge Barbara Lynn indicated she would issue her decision no later than Feb. 10.
Robyn Credico, defined contribution consulting leader North America for Willis Towers Watson, says that for large employers who sponsor retirement plans, the delay of the fiduciary rule just means they don’t know what is going to happen. There is “nothing much to do, but they’ve been preparing for the event something will happen. They will just have to wait some more,” she says. “I don’t think any of our clients will be particularly upset if they have to wait longer.”
For record keepers, they are “in a bit of a conundrum. They changed their processes, changed their training and, certainly, their tools. Now the question is what do they do in the interim? It is going to depend on how long the rules are delayed,” Credico says. Most will probably wait to implement any changes. They will just continue business as usual until they see what happens with the rules.
Willis Towers Watson has encouraged its large employer clients to look closely at their agreements with their record keeper and sign off and confirm that they would allow the record keeper to be a fiduciary to their plan if the rules end up proceeding. The brokerage also suggests that employers review their government structure and committees to make sure they have the right people in place and the right delegations of authority.
Some large plan providers have already gone ahead with becoming fiduciaries to their plans and will offer more useful help to plan participants “so there’s a debate about that and whether or not clients will value that difference. There is value in being able to tell plan participants what they can do with their rollover money and what they can’t do with their rollover money. There is value to participants and to the employer if the investment structures are such that they are being monitored and the expense ratios are much lower than they would get on their own; there is big value to that and employers keeping more assets in the plan, it is more buying power,” Credico says.
Credico adds that she believes the delay came a little too late in the implementation process. Many corporations and service providers have spent millions already changing their business practices and updating their communications materials in anticipation of the April 10 implementation deadline, especially broker-dealers.
“If they already did that, set up fee-for-service agreements, I’m not sure they can change that readily either. Probably, nobody could do anything about it. The delay came a little too late,” she says.
Tim Pawlenty, CEO of the Financial Services Roundtable, says that the delay of the fiduciary rules is “a necessary step to ensure modest-income savers maintain choice and avoid higher costs and reduced services as they try to save for retirement.”
He adds that, “financial professionals should act in the ‘best interest’ of their customers but such a requirement should be implemented without miles of bureaucratic red tape.”
Meanwhile, the Financial Planning Coalition — comprising of the Certified Financial Planner Board of Standards, Inc., the Financial Planning Association and the National Association of Personal Financial Advisors — says the organization “strongly opposes the action taken today by President Trump to halt the Department of Labor’s final fiduciary rule that will protect millions of Americans saving for retirement. With just two months to go before its implementation date, the president has effectively given the green light to maintain the status quo of conflicted financial advice.”
It added that Trump’s directive will “likely lead to either a complete gutting of this thoroughly vetted consumer protection or lead to its outright demise. Either one is a bad outcome for American retirement savers.”
The Financial Planning Coalition applauded the firms that already acknowledged the rule’s benefit to consumers and have taken action to comply with the rule.
“Already we are seeing benefits for retirement savers in the form of lower fees, more options and firms developing additional ways to serve middle-income Americans,” the group stated.