Last year, the U.S. Department of Labor unveiled a proposal that would extend a fiduciary standard to any persons who provide investment advice or recommendations to an employee benefit plan, plan fiduciary, plan participant or beneficiary, IRA, or IRA owner under the Employee Retirement Income Security Act (ERISA) of 1974 and the Internal Revenue Code, according to a release from the Labor Department. Since that announcement, the proposed fiduciary regulation has been the subject of contentious debate with opposition coming from many different arenas.
This past April, a final version of the Labor Department’s “conflict of interest” rule was unveiled that was supposed to have addressed many of the criticisms submitted during the public comment period. Early responses suggest that the final rule is definitely an improvement compared to the initial proposal but staunch opposition has not gone away because of the potentially disruptive nature of the fiduciary regulation. For example, Principal Financial Group estimates that complying with the Labor Department’s new rule will cost the company an estimated $1 million a month for the next 18-24 months, and between $5-$10 million a year afterwards. In fact, Ameriprise Financial executives said that compliance-related issues have already cost their firm $11 million in the first half of 2016, even though the full applicability of the new regulation has yet to kick in.
Indeed, the Labor Department’s rule is scheduled to have a two-tier phase in period, where advisers to IRAs and defined contribution (DC) plans with less than $50 million in assets will (beginning April 10, 2017) be required to act as fiduciaries, and full compliance will start in 2018. Once the latter occurs, according to Benefits Pro, advisers recommending fixed indexed and variable annuities will have to comply with the rule’s Best Interest Contract Exemption (BICE), which LIMRA has projected could result in a 30-35 percent decline in fixed indexed annuity sales. Similarly, Jim Weddle, a managing partner at Edward Jones, said in an interview with the Wall Street Journal that the company has already spent around $25 million to prepare for the new rule, and expects to curtail mutual-fund access for retirement savers in accounts that charge commissions due to compliance concerns.
An earlier report from Oxford Economics and the Financial Services Institute was submitted to the Labor Department and warned that compliance costs related to the new regulation were being “dramatically underestimated,” and that many smaller firms could find it difficult to stay in business. Moreover, broker dealers and investment advisers would be “forced to either substantially change their current business models or navigate the challenging demands of BICE.” As for retirement plan sponsors, a new Fidelity Investments survey revealed that 38 percent of sponsor respondents reported being concerned about their fiduciary duty, a significant increase from 24 percent last year, and 69 percent considered an advisor’s willingness to take on a formal fiduciary role to be important.
Sources: U.S. DoL, Benefits Pro, Insurance News Net, ThinkAdvisor, WSJ, NAPA, Fidelity InvestmentsPost author: Charles Couch