Concerns Advisers Now Face with the
DOL’s Fiduciary Rule
Pioneer Investments sat down with Fred Reish, ERISA attorney at Drinker Biddle & Reath LLP shortly after the
DOL’s Fiduciary Regulation was released to gain a better understanding of the greatest concerns advisers face.
Here are his insights…
The DOL’s regulation on fiduciary investment advice has generated controversy and concern. One concern is that advisers1 may no
longer help plans or IRA owners with their investments. While there is some basis for those concerns, the requirements of the final
regulation and exemptions, while burdensome, can be satisfied. As a result, advisers will be able to continue to work with plans and IRAs
in an effective manner. But, for some, there will be more disclosures and a higher standard of care. Advisers will need to begin complying
with these rules on April 10, 2017.
The fiduciary proposal will impact four areas of advice:
• Investment recommendations to plans
• Investment education and recommendations to participants
• Investment recommendations to IRA owners
• Recommendations to participants and IRA owners to take distributions or transfer their accounts
The changes will not affect broker-dealers and Registered Investment Advisers (RIAs) in the same way. As a result, it is easier to
understand the rules if each type of adviser is discussed separately. Since RIAs will be impacted the least, let us start there.
Fiduciary Rule and RIAs
For our purposes, the references in this article to RIAs are to pure level-fee RIAs. “Pure” means that all the compensation2 the RIA and
IAR (and all of their affiliates) receive is the stated fee for the advice, which could be a percentage of assets or a dollar amount. In other
words, there is no revenue sharing, proprietary products, etc.
Impact on advice to plans: None. The old rules and the new rules will work the same way for RIAs.
Impact on investment advice and education to participants: None. The rules for advice are the same. While small changes have been made
to the rules for participant investment education, those changes will not have much impact on RIAs.
Impact on advice to IRAs: None. It stays the same.
Impact on recommendations to take distributions from plans or IRAs: There are changes. Under the new rule, a recommendation to
take a distribution from a plan or to transfer (or withdraw from) an IRA are fiduciary acts. As such, the recommendation must be
prudent and in the best interest of the participant or IRA owner. Further, if the RIA will receive more compensation from a rollover
IRA than from the plan (e.g., a higher percentage of the assets), the recommendation will be a prohibited transaction. The Best Interest
Contract Exemption (BICE) provides relief from the prohibition if its conditions are satisfied. For pure level-fee advisers, though, the
requirements are less demanding than for other advisers.
The conditions are:
• Written acknowledgment of fiduciary status
• Compliance with specified “impartial conduct standards”
• Documentation of the specific reasons the recommendation is in the best interest of the participant or IRA owner
Concerns Advisers Now Face with the DOL’s Fiduciary Rule
However, there is an alternative. Distribution education is not considered a fiduciary recommendation. Generally stated, distribution
education explains the four distribution options and the important considerations for selecting among those options. If the distribution
education is unbiased, accurate and complete in material regards, it will not be considered fiduciary advice. As a result, it will not invoke
the prohibited transaction rules.
To document the education support, advisers should consider:
• Providing participants with distribution education brochures; including a provision in their advisory agreements concerning
education
• Having participants acknowledge that they received education and that the adviser did not make a recommendation*
The four distribution options are:
• Leave the money in the plan
• Transfer the account to the plan of a new employer (if the participant will continue to work)
• Rollover to an IRA
• Take a taxable distribution
There are a number of factors to consider in making that decision. Some considerations are:
• Costs of investments and services in the plan versus an IRA
• Range of investments in the plan and an IRA and whether a larger range of investments matters to that person
• Services in the plan compared to those that the adviser can offer to an IRA owner
• Whether the employer pays for some of the expenses of the plan
• Distribution flexibility in the plan and in the IRA
The DOL's thinking is that, with complete and unbiased education, a participant can make an informed decision about the best option
for him or her.
Fiduciary Rule and Broker-Dealers
Broker-dealers and their advisers often have financial conflicts of interest when they make investment recommendations. For example,
a broker-dealer may have affiliated investments or insurance products. Also, a broker-dealer may receive revenue sharing from
investments that its advisers recommend or, an adviser could affect the compensation that the adviser and the broker-dealer receive
by the investments the adviser recommends (e.g., mutual fund 12b-1 fees). Under the Employee Retirement Income Security Act of
1974 (ERISA), when an adviser becomes a fiduciary, those conflicts are prohibited, unless there is an exception, which ERISA calls
an “exemption.” However, exemptions have conditions. With that background, let us look at the impact on broker-dealers and their
advisers.
I mpact on advice to plans: Virtually all investment “sales” to plans will result in fiduciary status. There is an exception for sales to large
plans, which is generally a plan with $50 million or more in assets, but because of its requirements, that exception may not be popular
with advisers. Under the fiduciary standard, an adviser must act in the “best interest” of the plan. That means advisers need to engage
in a prudent process to develop their recommendations and must put the interest of the participants ahead of their own. That is a high
standard, but in my experience many advisers are already satisfying those requirements.
The second issue is the prohibited transaction rules. Without going into detail, some broker-dealers will probably opt for their advisers
to receive level compensation, either as a flat dollar amount or as a set percentage of assets. Group annuity contracts already work that
way. For an open architecture platform, the “level” payments could be made from plan assets or from expense recapture accounts.
However, if an adviser recommends proprietary mutual funds, or other affiliated investments, that would be a prohibited transaction.
In that case, it would be difficult, if not impossible, to levelize compensation. As a result, the adviser and broker-dealer would need to
rely on the BICE.
Note that, where plan assets are held at the broker-dealer (e.g., Keogh plans and solo 401(k)s), those plans will be treated like IRAs
(see the next page).
Concerns Advisers Now Face with the DOL’s Fiduciary Rule
I mpact on investment advice and education to participants: The final rule includes a “carve out” that permits advisers to provide
investment education to participants. Generally stated, the requirements are similar to the existing rules under the DOL’s Interpretive
Bulletin 96-1. As a result, current participant investment education practices will continue with few, if any, changes.
However, the adviser and broker-dealer will become fiduciaries if investment advice is given to participants. That means that the advice
must be prudent and in the best interest of the participant. It also means that the fiduciary prohibited transaction rules come into play.
However, where the adviser's compensation is level, (e.g., in the case of a group annuity contract, there is not a prohibited transaction).
If the adviser’s investment recommendations to a participant would not increase or reduce the amount the adviser and the broker-dealer
(or an affiliate) receives, there would not be a prohibited transaction.
I mpact on advice to IRAs: The impact will be similar to that for advice to plans: fiduciary status, possible prohibited transactions and the
need for exemptions.
If the compensation to the adviser and the broker-dealer (and all affiliates) is level (e.g., a set percentage across all assets), no revenue
sharing payments and no proprietary products, there will not be a prohibited transaction. But, if that is not the case, an exemption will
be needed.
There are two possible exemptions:
• Prohibited Transaction Exemption (PTE 84-24), which covers traditional and fixed annuities and insurance policies
• BICE, which covers mutual funds, fixed indexed annuities and variable annuities
For traditional fixed annuities, the PTE 84-24 exemption will provide a workable solution. Basically, 84-24 requires additional written
disclosures that must be approved by the IRA owner before the sale. The biggest change will be the best interest standard of care, which
requires that the adviser put the interests of the IRA owner first and that the recommendation be prudent. In addition, the adviser’s
compensation cannot be more than a reasonable amount.
I mpact on recommendations to take distributions from plans or IRAs: The analysis is similar to the discussion for RIAs. The level-fee
alternative will work if the broker-dealer and the adviser use a level-fee IRA. If not, the more demanding BICE conditions will apply.
One approach is to provide education on the four distribution options to help participants and IRA owners make informed decisions.*
Participants will almost certainly want to continue to use rollovers to better control their finances, to consolidate and simplify their
financial lives, to obtain personalized advice and planning and to maximize flexibility for distributions.
However, if the adviser wants to make distribution recommendations of rollovers to IRAs that will invest in mutual funds or other
securities, the adviser and the broker-dealer will need to satisfy the conditions in BICE.
Some of the most significant conditions are:
• A Best Interest Contract Exemption, which acknowledges fiduciary status and agrees to the Best Interest standard of care
• The contract must be executed by the broker-dealer and the investor no later than the point-of-sale; but, it must be retroactive to cover
all advice and recommendations
• The contract must provide that no more than reasonable compensation will be received by the adviser, the broker-dealer, and all
affiliates
• All material conflicts must be disclosed
• The adviser cannot receive any form of compensation that “would reasonably be expected to cause advisers to make recommendations
that are not in the Best Interest” of the investor
• Disclosures must describe how the adviser and broker-dealer will be paid
Concluding Thoughts
The DOL's rule may seem daunting. However, the final guidance has workable, if difficult, requirements. The rules require more
disclosure and a Best Interest standard. But, disclosure and high standards should end up helping quality advisers, not hurting them.
That is not to discount the time, effort and cost of complying with these changes. But, it is to say that business will move forward and
that advisers who provide quality services at a reasonable cost will fare well.
Concerns Advisers Now Face with the DOL’s Fiduciary Rule
About the Author
Fred Reish is a partner in the firm’s Employee Benefits Team and Chair of the ERISA and Retirement Income Teams.
His practice focuses on fiduciary issues, prohibited transactions, tax-qualification, retirement income, etc. and advises
broker-dealers and registered investment advisers within these areas. He also represents plans, employers and
fiduciaries before the DOL and IRS. Fred is a nationally known speaker on fiduciary responsibility, technical compliance
matters and litigation issues.
Fred Reish, Esq.
Partner
Drinker Biddle & Reath LLP
This article refers to “advisers” because the regulation uses the term “fiduciary advisers.” However, the impact is not limited to registered investment advisers.
It also covers broker-dealers (and their advisors), insurance brokers and agents, and others who recommend investments to plans or IRAs, or who recommend to
participants or IRA owners that they take distributions from their plans or IRAs.
1
2
For the purposes of these rules, “compensation” means any money or item of monetary value that is related to the investment recommendations.
*
Contact Pioneer Investments at 800-622-9876 for a copy of the Education Provision.
For more information, please contact your Pioneer Retirement Investment Only Regional Vice President at 800-622-9876.
The views expressed within this paper are those of the author and not necessarily Pioneer Investments, and are subject to change at any time. Neither Pioneer, nor its
representatives are legal or tax advisors. In addition, Pioneer does not provide advice or recommendations. Pioneer Investments is not affiliated with Drinker Biddle & Reath
LLP or Fred Reish, Esq.
Securities offered through Pioneer Funds Distributor, Inc., 60 State Street, Boston, MA 02109
Underwriter of Pioneer mutual funds, Member SIPC
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