As it stands today, the Department of Labor’s (DOL) Fiduciary Conflicts of Interest Rule is set to take effect on April 10, 2017. As with most new rules or regulations, there are a lot rumors and speculation surrounding how the rule will be applied and who will be impacted. If you are a plan sponsor of a qualified retirement plan, like a 401(k), then now is the time to educate yourself as to who is working with the plan and how his or her role will be impacted by this rule. Here are the definitions of some commonly used terms that are associated with the rule.
Glossary of Terms: DOL Fiduciary Rule
Best Interest Contract Exemption
This provision of the DOL rule requires an advisor to enter into a written agreement with a client before advising him or her and receiving commission-based compensation. The agreement should confirm the advisor will act in the client’s best interest and disclose any conflicts of interest that may exist.
This type of compensation pays a percentage of a product sold on each transaction. Trails are a form of recurring commission that pays a stated percentage annually for a sale made in the past.
Department of Labor (DOL)
The United States DOL oversees services and advice provided to retirement accounts, and it is one of the agencies responsible for enforcing ERISA. The DOL has proposed this revised fiduciary rule with the goal of expanding protection for clients’ retirement assets.
Employee Retirement Income Security Act of 1974 (ERISA)
ERISA regulates and protects retirement assets by establishing rules that plan fiduciaries must follow.
In fee-based accounts, advisors charge a management fee based on the amount of assets. The opposite form of compensation would be transaction based, such as commissions.
In qualified retirement plans, advisors charge a fee for services provided. The fee may be based on a percentage of plan assets or a flat fee.
ERISA defines “fiduciary” as anyone who exercises discretionary authority or control over a retirement plan’s assets or provides investment advice to a plan. Fiduciaries are held to a higher standard of accountability than are brokers, and they are required by law to act in the best interest of their clients. The DOL rule seeks to expand the definition of fiduciary to anyone providing advice on retirement plans.
A suitability standard requires advisors to reasonably believe their recommendation will meet a client’s needs, given the client’s financial situation and risk tolerance. This standard is not as strict as a fiduciary standard.
If you are feeling a bit overwhelmed or confused by what is involved, you are not alone and we are here to help. Please contact me at firstname.lastname@example.org or 205.970.9088 to learn more.