The new DOL fiduciary rule: How it could change your company's 401(k) plan

The Department of Labor’s (DOL) fiduciary rule has been a subject of debate and revision for years. The rule’s latest iteration, proposed in 2023, aims to protect investors by ensuring that financial advisors prioritize their clients’ best interests when recommending retirement investments. While still under consideration, this rule has the potential to significantly impact how companies structure their 401(k) plans.

To better understand the DOL’s objectives, let’s start with some context. The Employee Retirement Income Security Act (ERISA) was enacted in 1974 to regulate retirement plans. ERISA established fiduciary standards, which are more stringent than suitability standards, as the basis for governing investment advice. Fiduciary standards and suitability standards are both crucial concepts that determine the level of care a financial advisor must provide when offering investment advice. Suitability standards only require recommendations to be “suitable,” while fiduciary standards demand the highest possible level of care. Many advisors work under suitability standards only.

Regarding the DOL’s most recent proposed changes, there are three main points to focus on.

1. Expanded definition of “fiduciary. The rule broadens the category of those deemed “fiduciary” under the Employee Retirement Income Security Act (ERISA). This means more financial professionals advising on 401(k) plans, including rollovers, are legally obligated to put their clients’ interests ahead of their own.
2. Rollovers. There is added scrutiny on rollovers, the process of moving funds from a 401(k) to an Individual Retirement Account (IRA), because rollovers are often seen as points of vulnerability for investors. The new rule places stricter scrutiny on recommendations to rollover, aiming to prevent advisors from pushing rollovers that are not in the investor’s best interest.
3. Prohibited transaction exemptions. The DOL is also reworking certain exemptions that allow advisors to receive otherwise prohibited compensation (like commissions) under specific conditions. These reworked exemptions include more rigorous requirements companies and advisors must meet.

Companies will need to make necessary adjustments to comply with the new regulations. It is expected that there will be an increase in scrutiny when choosing plan advisors. It will become essential for companies to perform a thorough background check on the financial advisors and firms they hire to manage their 401(k) plans. To avoid potential legal issues, fiduciary standards must be met.

Companies should consider reassessing the fees associated with their plans, particularly if they rely on commission-based advisors. They may need to shift their plan’s fee structures to better comply with the fiduciary rule. In addition, they may need to make changes to their investment options by re-evaluating the range of choices offered in their 401(k) plans. Prioritizing options with lower fees or those less susceptible to conflicts of interest may be necessary.

Companies may need to increase their efforts to educate their employees about investment options, fees, and the importance of rollovers. This is important to ensure employees make informed retirement savings decisions. Heightened education and communication initiatives can be implemented to enhance the understanding of investment options and fees. Sound financial education can significantly impact an employee’s post-retirement finances.

It is important to stay informed about the proposed DOL rule changes, which are still under review and may undergo modifications. Companies should keep themselves updated on the progress of the rule and take steps to mitigate any issues that may arise.

Related: DOL sends controversial new fiduciary rule to White House for review

Consulting with legal counsel is crucial to understanding the nuances and implications of the rule for your company’s 401(k), so seeking advice from legal professionals specializing in ERISA compliance is highly recommended.

Regardless of the changes in the rules, it is also essential to evaluate your company’s retirement plan proactively in light of potential changes. Assess your current advisor relationships, fee structures, and investment options. Examining whether your current service meets your needs could uncover issues whose solutions could have big impacts.

Maintaining open lines of communication with employees about any potential changes to the 401(k) plan is equally important. Ensure that they have access to clear explanations and resources to make informed decisions. The DOL fiduciary rule emphasizes prioritizing the financial well-being of retirement savers. By understanding the rule’s implications and proactively adapting their 401(k) practices, companies can foster a retirement savings environment that truly serves their employees.

Nathan Boxx, director of retirement services at Fort Pitt Capital Group, offers insight on how to choose the right plan for a comfortable retirement, Social Security benefits, and an overview of what happens when a small business owner retires (transferring or selling the business).