Mark June 9, 2017 on your calendar. That's the day the lowly IRA entered the retirement plan big leagues. Previously, IRAs had significantly less regulatory oversight than ERISA plans. But with the redefinition of “fiduciary” in the DOL's conflict-of-interest (aka, “fiduciary”) rule, IRAs now fall under the ERISA regulatory umbrella.
What does this mean for plan sponsors? Where will the change be seen by retirement savers? How will financial service providers respond to this watershed event?
Traditional corporate plan sponsors are impacted by the conflict-of-interest rule. This impact will manifest itself primarily in the due diligence process of selecting and monitoring service providers. The size of this impact will be directly proportional to the percentage of service provider fees paid out of plan assets. If the plan sponsor pays all plan fees out of corporate business accounts, the new rule will not apply. The rule only applies to service providers who are paid for out of plan assets.
There is, however, a nuance in this where it's not completely certain whether the plan sponsors will be held accountable. This situation occurs when an ex-employee rolls assets out of the plan and into a personal IRA. It has not been determined (by case law, the way all such things are and will continue to be determined) whether the plan sponsor has any oversight responsibility to monitor whether outgoing plan assets are being sent to proper fiduciaries. It is likely plan sponsors may be held liable if financial firms receiving assets also have a fiduciary relationship with the plan, less likely if those firms have no pre-existing relationship with the plan.
For retirement savers, the question of where the fruits of the conflict-of-interest rule will surface remains to be seen. Certainly, we can expect to see a new paragraph or two in client agreements (this would be language addressing the best interest contract exemption). However, because the rule won't be enforced until next January (at the earliest), there's no clear expectation as to when this language will begin appearing. Furthermore, if we can use the DOL's 2012 “401(k) Mutual Fund Fee Disclosure Rule” as a guide, it's unlikely any changes brought forth by this 2017 rule will be easily understandable. As a result, it's unlikely we'll see any behavior modification on the part of retirement savers until some smart class action attorney finds an opening.
Lastly, whither the financial service professional? They appear to be caught in some hazy limbo. Any wrong step can send them tumbling into the abyss of a fiduciary breach. The trouble is, the ground is so foggy, it's hard to see where you're stepping.
We know the intent of the DOL is to embrace IRAs with the same regulatory arm as corporate retirement plans. Cautious service providers will accept this inevitability and begin treating IRAs with the same kid gloves they use with DB and DC plans. Any other strategy entails unknown risk. The fiduciary rule means IRAs and 401(k)s are the same thing.
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Christopher Carosa
Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).
