The new fiduciary rule that was introduced by the Department of Labor (DOL) and released in its final form on April 6 will have an enormous impact on the financial and retirement planning industry. It will make it harder for brokers and planners to work on commission with additional layers of disclosures and paperwork. But there may be a silver lining for small business plan owners, because the advisors who implement and manage their retirement plans will now be held to a much higher standard of conduct.
Provisions of the Rule
Before the DOL rule was implemented, financial planners and advisors who were not classified as registered investment advisors (RIAs) under Securities and Exchange Commission (SEC) regulations sold their products to clients using the suitability standard, which is a much lower standard of conduct than what is required of a fiduciary. But the DOL rule now automatically elevates all financial professionals who work with retirement plans to a fiduciary status. Brokers and agents who want to continue receiving commissions for their services must now do so under the BICE provision, which requires them to disclose how much they make from each transaction and still promise that they are acting unconditionally in the best interests of the client even though they are receiving a commission. (For more, see: A First Look at the Finalized Fiduciary Rule.)
This rule could effectively leave many brokers and planners who have recommended and implemented retirement plans that are rife with fees, commissions and other expenses vulnerable to lawsuits by clients who did not know how much they were really paying for the products and services that they received. And employees who participate in these plans may not be the only plaintiffs in these cases. Business owners who sponsor these plans may also have recourse against advisors in a way that they did not before, because they can now file a complaint that the broker is failing his or her fiduciary obligation by using a plan with high fees and expenses.
Small Business Owners
But small business owners will also likely benefit from the new rule by being able to count on their participants receiving a fiduciary level of care from now on. This new standard may well result in lower fees, more transparent plan pricing and superior investment choices within the plan. This all means a lower level of liability for them, as they can currently be sued by plan participants who are dissatisfied with their plans and blame their employer. But while business owners may become less liable for high fees or poor investment performance within the plan, any recourse that they try to take against a broker or planner who does not meet the fiduciary standard may have to settle for arbitration instead of court, and this type of case can be difficult to prove in many cases. (For more, see: The Fiduciary Rule: How and Why to Outsource Your Risk.)
The new DOL rule will most likely make 401(k) plans a more popular choice for business owners because of the fiduciary protection that they will now carry. The rule will not apply to 403(b) plans, as they are not technically governed under ERISA. But 403(b) plan sponsors would be wise to pay attention to this rule anyway, as similar legislation may come their way at some point.
The Bottom Line
The new Department of Labor fiduciary rule is intended to provide an additional layer of protection to retirement plan participants and consumers who purchase annuities and other retirement planning products. Small business owners who previously assumed a high level of liability for the plans that they sponsored may see a reduction in the amount of risk that they take in this area. (For more, see: How SEC and DOL Fiduciary Standards Could Differ.)