Fiduciary Rule Struck Down But Plan Sponsors Not Off the Hook

Despite a circuit court ruling that essentially (at least for now) nullifies the Department of Labor's consumer protections, retirement plan sponsors still need to do the right thing … or else. And consumers need to keep an eye out.

(Image credit: alfexe)

On March 15, 2018, the 5th Circuit Court vacated the entire DOL fiduciary rule. The decision essentially nullifies the rule, which was designed to require financial professionals to put their clients’ needs ahead of their own when advising them on retirement accounts. It was first put in place in 2016, and then subjected to a series of delays.

The court ruled that the Department of Labor (DOL) overreached its authority by placing rules on the investment industry. Prior to this rule, the DOL stayed within the confines of labor, regulating companies.

Shockingly, many in the investment industry opposed the fiduciary rule. It was an insurance company that sued the DOL in the 5th Circuit decision. A quick Google search of other lawsuits against the DOL to stop the fiduciary rule show that many were filed by insurance and annuity companies.

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There may be a reason for this. Insurance companies are regulated by each state, not by the federal government. Generally, insurance and annuity companies follow a “suitability” standard of care. This is a lower standard than the more strict fiduciary “best interest” standard. As Elliot Weissbluth of HighTower Advisors said in InvestmentNews (opens in new tab) on March 16, 2018: “This is not a complicated argument. Those people who are complicating it are doing so because they have an economic interest in not putting the client's interest first.”

Will Plan Sponsors Get Cut Some Slack?

So, should plan sponsors — the people who set up retirement plans for employees’ benefit — throw a party now that the fiduciary rule is back in limbo? Not quite. The fiduciary rule was aimed mainly at investment companies, not plan sponsors. However, there were areas that affected plan sponsors … and they will continue to do so. Primarily a heightened regulatory environment and awareness by plan participants. Just because the fiduciary rule was overturned doesn’t stop plan sponsors from being fiduciaries. In fact, their role as fiduciary is likely to come under greater scrutiny.

And what about consumers who are saving for retirement? Does that mean they don’t have anything to worry about? Again, the answer to that question is not quite. But more on that in a bit.

It is possible that the DOL will continue to fight the ruling in court, all the way to the Supreme Court. This is because in the previous challenges to the rule, the DOL has won. Just the week before the rule was overturned, the 10th Circuit Court upheld it. So, with opposing rulings from circuit courts, the next logical stop is Washington and the Supremes.

Watch Out: Confusion Ahead!

While all of this is going on, the SEC is racing to come out with their own fiduciary rule. And, not wanting to be left out, in case the feds can’t get their acts together, many states are cobbling together their own fiduciary rules. Can you imagine the nightmare that would be? Each state with slightly different fiduciary rules — that is not a pretty picture.

The 5th Circuit ruling has turned this into a turf war. Basically, the DOL’s fiduciary rule was mainly aimed at the investment industry, which includes insurance and annuity companies. But the court ruling said (and maybe rightly so) that the DOL was not authorized by Congress to regulate insurance and annuity companies. The states regulate them.

But, in my opinion, the concept of a fiduciary standard seems to rise above the turf war. And besides, the DOL already regulates insurance and annuity companies, since many of them are used to fund 401(k)s. They are required to follow ERISA, which the DOL oversees.

Plan Sponsors Still Have Work to Do

So where does that leave you, the plan sponsor? Is your head spinning yet? As a fiduciary you have a number of responsibilities that none of your current 401(k) service providers can help you with. Sure, there may be a fiduciary on the plan to oversee the funds and replace as needed. But there are several other issues you still must worry about:

  • Is anybody maintaining a Fiduciary File?
  • How about a Policies & Procedures manual? Do you have one?
  • When was the last time you gave the participants an education seminar? Can you prove it? Was it documented?
  • How do you avoid prohibited transactions? Do you know what they are?
  • Have you determined the time frame of the Plan?
  • How about the risk? Is it objectively quantified?

All of those things and more were requirements BEFORE the new fiduciary rule. So if you weren’t/aren’t doing them, you are opening yourself up to a possible breach of fiduciary duties. Ask your lawyer what that means. And then change your underwear.

Plan Sponsors’ 3 Possible Courses of Action

So, as a plan sponsor, what do you do?

1. Do nothing.

This is not recommended. Many plan sponsors we have talked with either didn’t know they were fiduciaries or denied they were, even after we showed them the definition of a fiduciary. (Plan sponsors are fiduciaries by definition.) This doesn’t serve your employees well, and it leaves you exposed to regulation and litigation.

2. Proceed forward as if the DOL rule were in place.

Understanding the heightened scrutiny plan sponsors are likely to come under, this is a good first step. Find out what your responsibilities are and act on them. In April 2016, The Society for Human Resource Management said in an article titled, “How the Fiduciary Rule Affects Plan Sponsors (opens in new tab),” “Unless the plan sponsor is large enough to have an ERISA specialist in-house, experts recommend retaining an ERISA attorney or consultant…” This area is too complex to go it alone, and as plan sponsor consultants, we have seen companies — both big and small — whose houses were in disarray. But with work, they could be brought back into line.

3. Step up and adopt best practices that do not depend on the regulatory rulemaking.

This is highly recommended. Doing what is right for the plan and participants both is always the best answer. It’s more work, but it is better to be prepared than surprised.

Once a plan sponsor accepts the responsibilities they have as a fiduciary, and starts down the road of fiduciary excellence, what is going on in the courts, Washington and the regulators won’t matter. There are no rules against doing what’s right.

As one of our plan sponsor consulting clients said to me after I told him about the 5th Circuit decision: “I wish to proceed on the basis of a more strict, or responsible, approach and stay to a higher standard. So, I want to act and behave as a fiduciary. Can't go wrong that way.”

Finally, a Word to Consumers

How does this all affect you? For many people, your largest investment is your 401(k). Ask your HR person how often they do plan reviews. Ask them when was the last time they had an independent compliance review. Ask them if they have written policies and procedures and a fiduciary file. They may not know the answers, but it may get them thinking. Does your company offer participant education? Do you attend?

As for your personal money, who manages your IRA? Who manages your trust? Your personal investment account? Is it a broker, who is only subject to the lower standard of care — suitability? Or is it a Registered Investment Advisor (RIA), who is subject to the higher standard of care — best interest? RIAs for the most part were not opposed to the DOL’s fiduciary rule, because RIAs were already employing the best interest standard of care.

Third-party posts do not reflect the views of Cantella & Co Inc. or Cornerstone Investment Services, LLC. Any links to third-party sites are believed to be reliable but have not been independently reviewed by Cantella & Co. Inc. or Cornerstone Investment Services, LLC. Securities offered through Cantella & Co., Inc., Member FINRA/SIPC. Advisory Services offered through Cornerstone Investment Services, LLC's RIA.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

John Riley, AIF
Chief Strategist, Cornerstone Investment Services

In 1999, John Riley established Cornerstone Investment Services (opens in new tab) to offer investors an alternative to Wall Street. He is unique among financial advisers for having passed the Series 86 and 87 exams to become a registered Research Analyst. Since breaking free of the crowd, John has been able to manage clients' money in a way that prepares them for the trends he sees in the markets and the surprises Wall Street misses.