Key steps employers should take (before DOL's 'complicated' new fiduciary rule is final)

Until recently, employers’ fiduciary responsibilities for managing their retirement plans have been fairly straightforward. The Department of Labor (DOL) requires plan sponsors to exercise prudence and care when evaluating and choosing investment options, keeping expenses reasonable, managing risk, providing appropriate educational resources and avoiding conflicts of interest. Plan sponsors also need to provide full disclosure of all fees participants pay for plan services and investments.

But in November 2023 the DOL proposed new rules that could hold plan sponsors responsible for ensuring that retiring employees receive appropriate fiduciary investment advice long after they retire.

Employers who fail to meet these fiduciary standards could find themselves in the legal crosshairs of both the DOL and disgruntled former participants.

The rules in a nutshell

The DOL’s proposed rules are complicated and convoluted, but they essentially boil down to this: Anyone paid to give investment advice to retiring or retired plan participants must always act solely in the retiree’s best interests.

The rules are primarily designed to curb self-serving behavior among recordkeepers and their affiliated brokers and insurance agents who go after lucrative rollover opportunities.

When plan participants retire, they’re often bombarded with “educational” content on the plan’s self-service portals and email or direct marketing campaigns “explaining” the various rollover options available.

As they’re retiring, they’re often encouraged to call brokers or insurance agents whom they assume are “retirement experts.” Many are paid commissions and bonuses to steer them into their proprietary IRA or annuity products without fully disclosing their hefty fees and limited investment choices.

The DOL’s objective to rein in any predatory practices is a well-intentioned response to plan participants’ complaints about a lack of transparency around these rollover recommendations coming from commission-based advisors. But these proposals could increase employers’ exposure to plan-related liabilities. And potentially put employers at risk. Plan sponsors would have to continually monitor their recordkeepers’ rollover-related marketing activities to make sure that their “advice” complies with fiduciary requirements that even regulators struggle to define in practical terms.

Retirees who believe that recordkeepers “mislead” them into rolling over their retirement plan money into their proprietary IRAs or annuities when better options were available might sue their former employers for failing to protect their best interests. Companies could still be on the legal hook even if a retiree kept their assets in the retirement plan for years before making a rollover decision.

But beyond the liability risk the DOL’s proposals create, these rules focus on regulating product-related advice, rather than addressing a much larger issue: That most plan participants simply aren’t prepared to make critical rollover-related decisions when they’re about to retire.

Other, more pressing financial questions take precedence. What will their cash flows  be during a retirement that may last several decades? How much of their income will come from Social Security, pensions, and taxable and retirement accounts? Will the nest eggs they’ve spent a lifetime building run out before they die? Will taxable Required Minimum Distributions adversely impact their Social Security and Medicare benefits?

Only when they’ve gained a firm understanding of their retirement-related financial challenges and opportunities is it appropriate for them to consider their rollover options.

This level of retirement income planning is far beyond the capabilities of most retirees. They need professional help to take them through this complex and time-consuming process. But the brokers and insurance agents affiliated with their plan’s recordkeepers aren’t qualified to provide this kind of holistic advice. And the DOL’s new rules won’t require them to.

A simple, proactive solution

Even if a new fiduciary rule is pushed back, the handwriting is on the wall. The DOL will likely take additional steps to help 401(k) plan participants improve their understanding of rollover recommendations and advice options.

Plan sponsors can become part of this process by simply giving employees access to the objective, retirement planning advice they need from independent, fee-only fiduciary advisors.

Employers can proactively deliver this resource inexpensively by cultivating their own lists of vetted fiduciary advisors located in the regions where employees live and work. Or they can provide links to reputable industry organizations and vetted partners such as National Association of Personal Financial Advisors, Fee-Only Network, XY Planning, and Wealthramp that can match employees with these professionals.

Part of the plan sponsor’s role in this effort will be to explain, in a non-judgmental manner, how fiduciary advisors differ from brokers and insurance agents in terms of the scope of services they provide, how they’re compensated, and how their advice and actions are regulated—and by whom.

The goal is not to convince employees to choose a fiduciary advisor over a broker or insurance agent. It’s about providing a fiduciary advice option that lives outside the plan, and then providing the essential education individual employees need to make their own decisions.

Related: What’s the impact of DOL’s new fiduciary rule? A Q&A with Colonial Surety’s Richard Clarke

Plan sponsors interested in taking this step shouldn’t wait until the DOL’s rules are finalized. These resources will be helpful for participants who are leaving the company, as well as employees who are years away from retirement but are looking for a trusted advisor to help them manage their complex financial lives. They could add a layer of protection against future lawsuits.  They may help companies attract and retain employees. And, most of all, it’s the right thing to do.

Pam Krueger is the founder and CEO of Wealthramp, an SEC-registered adviser matching service that connects consumers with rigorously vetted and qualified fee-only financial advisers. She is also the creator and co-host of the award-winning investor education series, MoneyTrack, seen nationally on PBS, and the Friends Talk Money podcast.