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How Do New DOL Regulations Impact Plan Sponsors?


ERISA IN THE MODERN WORLD   In 1974, when the Employee Retirement Income Security Act (ERISA) was first enacted, the world was a different place. Gas was 55 cents a gallon[1], Bennie and the Jets topped the charts, 401(k) plans did not exist, and IRAs had just been authorized. Since that time, there has been a dramatic shift in the retirement savings landscape. Forty years ago, the world was one of defined benefit pension plans, while today America’s primary retirement vehicle is defined contribution retirement plans. Research from EBRI illustrates the shift from DB to DC plans over the decades. In 1979, 62% of employees who participated in private-sector, employment-based retirement plans were enrolled in a defined benefit plan, while just 16% were enrolled in a defined contribution plan.  When 401(k)s were made available in the mid-80’s, the pendulum began to swing in the opposite direction.  By 2011, 69% of employees participating in private-sector, employment-based retirement plans were enrolled in a defined contribution plan, while a meager 7% were enrolled in a defined benefit plan.[2]  Interestingly enough, even with the drastic change in utilized plans, the rules have not been meaningfully changed since 1975.[3]

The changes in the retirement savings marketplace over the past 40 years have increased the importance of sound investment advice for workers and their families.  For years, there has been a push to eliminate conflicts of interest in retirement planning. The crux of this initiative is that all advisors should be held to the same (fiduciary) standard when offering investment advice, putting their clients’ best interests before their own profits.

FIDUCIARY VS. SUITABILITY STANDARD   Essentially, fiduciary and suitability standards are different and boil down to the language used to define each. ERISA requires advisors to act as “prudent experts” and uphold the fiduciary standard, acting in the best interest of the client; whereas FINRA requires that advisors “have a reasonable basis to believe” that a recommendation is “suitable.” Following the recent release of the DOL’s conflict of interest rule, Pioneer Investments conducted a survey which revealed that 51% of advisors believe that the regulation would help their business by leveling the playing field for retirement advice and eliminating competition from advisors who are not willing to accept fiduciary responsibility.[4]  Additionally, 37% of advisors believe the rule will help investors, eliminating conflicts of interest by placing the investor’s best interest ahead of the advisor’s best interest.  Ten percent of advisors see the new rule as a non-event for investors.4  

WHAT THIS MEANS FOR PLAN SPONSORS   While aimed toward financial advisors who provide retirement plan services, the final rule will impact compliance obligations and costs for plan sponsors as well. This may manifest in a number of ways. For instance, new regulations may impact existing advisor relationships and the manner in which investment advice is delivered. Also, plan sponsors may see an increase in the amount paperwork and disclosures, as well as an increase in the need to fully understand the plan’s fee structure.

YOUR ADVISOR RELATIONSHIP   If you are unsure of how this impacts your plan or advisor relationship, one of the strongest actions you can take is asking questions and documenting the response.  These questions may seem like common sense; however, until this point, acting in the “best interest” of retirement plan clients was not a legal requirement. Here are some questions to ask your current advisor:

  1. Are you conflicted?
  2. Are you a co-fiduciary to our plan?
  3. Are you qualified to act as a co-fiduciary?
  4. How many retirement plan clients do you have?
  5. With the new DOL rule, should we be aware of any conflicts of interest?
  6. What is your compensation?
  7. Is your compensation levelized?
  8. Could you provide a list of your services?
  9. How is your firm training and educating you on the new rule to best service our plan and reduce our fiduciary risk exposure?

While these changes will directly impact your company’s retirement plan and place heightened importance on plan documentation, it’s okay.  This rule change is for the better of the retirement investor.  It will raise the advisor standard to genuinely act in the best interest of their clients.  At Financial Management Network, we have been fiduciary advisors for over 25 years.  We have always had our clients’ best interests in mind.  This is business as usual, and we’re proud to continue servicing our clients as fiduciaries.

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Investment advisory services are offered by Financial Management Network, Inc.(“FMN”) and securities offered through FMN Capital Corporation, (“FMNCC”), member FINRA & SIPC

[1] Collins, Bob. "Runup in Gas Prices Exceeds Price Impact of ’73 Oil Embargo." NewsCut. MPR News, May 2013.

[2] "FAQs About Benefits—Retirement Issues." Retirement Chart Data Question Figure 2. Employee Benefit Research Institute, 2011.

[3] "Fact Sheet." : Department of Labor Finalizes Rule to Address Conflicts of Interest in Retirement Advice, Saving Middle-Class Families Billions of Dollars Every Year. Department of Labor, Apr. 2016.

[4] "Industry Remains Divided on Impact of DOL Fiduciary Rule, According to a Pioneer Investments Survey." Business Wire. 21 Apr. 2016.

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