April 16, 2015

New Fiduciary Rules Proposed

“Today, I’m calling on the Department of Labor to update the rules and requirements that retirement advisors put the best interests of their clients above their own financial interests. It’s a very simple principle: you want to give financial advice, you’ve got to put your clients’ interests first.”

~President Barack Obama, February 23, 2015

Recognizing that the basic rules governing retirement investment advice have not changed significantly since 1975, the Department of Labor (DOL) has been working recently to address one of the most challenging issues in the retirement plan industry: conflicts of interest that impact the growth of savers’ investments. Under the existing rules, many retirement plan investment professionals, consultants, and advisors are exempted from fiduciary standards and provide advice based on their own, and not their clients’, financial interests. On April 14, the DOL issued its new, and highly anticipated, proposed rule, addressing when these service providers will be deemed fiduciaries and limiting their conflicts of interest with clients.

The proposed rule focuses on two main changes to the existing regulations:

  1. An expanded definition of “fiduciary,” and
  2. An overhaul of the existing exemptions to reduce conflicts of interest

“This boils down to a very simple concept: if someone is paid to give you retirement investment advice, that person should be working in your best interest.”

~ Secretary of Labor Thomas E. Perez

New definition of fiduciary

The Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (the Code) require fiduciaries to put their clients’ interests first when giving investment advice. However, in 1975, the DOL issued regulations that significantly narrowed the definition of a fiduciary. The DOL’s new proposed rule would expand the definition of a fiduciary to include any individual or company who receives any compensation for providing individualized investment advice and/or recommendations to a retirement plan sponsor, plan fiduciary, plan participant or beneficiary, IRA, or IRA owner. The proposed rule specifically exempts certain “non-fiduciary” activities, including investment/retirement education, as well as “order taking” (simply placing an order with a broker) and sales pitches to plan fiduciaries.

Reducing conflicts of interest

Fiduciaries are required to provide impartial advice in their clients’ best interests and cannot accept direct or indirect compensation that constitutes a conflict of interest unless they qualify for a specific exemption under ERISA or the Code. A broader definition of fiduciary, therefore, should help reduce conflicts of interest. The proposed rule takes a further step by creating a new type of “prohibited transaction exemption” or PTE: the Best Interest Contract Exemption.

Existing PTEs are limited in scope and narrowly applicable, but prone to loopholes. The new Best Interest Contract Exemption is more flexible; it permits broader exemptions for different forms of compensation, such as revenue sharing and commissions, but also provides broader protection by requiring the adviser to:

1)      enter into a contract with their client that specifically commits the adviser to providing advice in the client’s best interest;

2)      warrant that the adviser has adopted policies and procedures to mitigate conflicts of interest; and

3)      clearly and prominently disclose conflicts of interest: the contract must include a webpage that lists the adviser’s compensation arrangements.

The Best Interest Contract Exemption should help to protect plans and participants from conflicts of interest, while maintaining the ability for advisers to use common compensation arrangements.

The DOL’s regulatory impact analysis estimates that the new proposed rule will save investors more than $40 billion over the next ten years, with possibly much greater long-term savings. The agency is seeking feedback and perspectives from all stakeholders; comments on the proposed rules are welcome during the 75-day notice and comment period. If the proposed rules are ultimately adopted by the DOL – a prospect that is not certain – the requirements would become effective eight months after publication in the Federal Register.

At Arnerich Massena, we are pleased that retirement plan investment advisers and consultants will be held to a higher fiduciary standard, and are proud of the fact that we have always been ahead of the curve, having offered unbiased advice to retirement plans as an explicit co-fiduciary since our inception. We will continue to analyze the new proposed rule and update our clients on its potential adoption over the coming months.


Read the DOL’s fact sheet on the proposed rule here:


Access the complete proposed rule, the regulatory impact analysis, the press release, and related FAQs here: