Three Potential Unintended Consequences of the DOL Fiduciary Rule

Time is money

It’s official! As of June 9, 2017, the Department of Labor Fiduciary Rule, as was written into law in April 2016, started its initial applicability phase with a final enforcement date of January 1, 2018. Quite honestly, to this point the DOL rule has mostly been a “monster in the closet” for financial services professionals; we have been unsure of exactly what to do, how to do it, and who will be on the hook for it. What is becoming more clear is that there may be a large number of advisors who chose to run away from the business completely rather than to adjust and adapt to the new regulations. If that happens, then it is estimated that we may see the financial advisor industry cut in half. If you are a non-advisor reading this you probably are asking yourself “what’s the big deal if a few financial advisors lose their jobs?” Here are three unintended consequences that plan sponsors should be aware of in the coming months.

  1. It may become more difficult to roll money out of the 401(k) plan                      The traditional advisor model for accepting 401(k) rollovers under a certain monetary threshold, $100,000 for instance, has been to use investment products that pay an upfront commission and trails through the investment product itself. This business model will no longer be allowed in retirement accounts, like rollover IRAs. Therefore, I believe it is going to be increasing difficult for participants to find financial advisors that are willing to work with “small” retirement accounts – there is too much risk and not enough reward for the advisor. The participant will still be able to rollover his account into a brokerage account that he will manage, but without the encouragement of an advisor this may be unlikely to happen. As a plan sponsor or other fiduciary to the plan, you remain responsible for all participants in the plan, even if they are terminated, which means you must keep sending those terminated participants with a balance in your plan all of the same notices you would a currently employed participant. Furthermore, plan sponsors need to place increased importance on making sure that the investments in the plan meet the needs of all participants, including the terminated with balances.
  2. Participant education may look different                                                                There is a thin line of distinction between participant advice and participant education drawn out in the Fiduciary Rule. If the advisor offers education, there is no fiduciary relationship created; however, offer advice and the advisor is now a fiduciary to that specific participant or group of participants that the advice was rendered to. Again, this blurred line can put advisors in an uncomfortable position of wanting to help participants without taking on undue liability. Plan providers are also caught in this crosshair. In fact, Fidelity, the largest record keeper of defined contribution plans, has taken the drastic step of making their call center representatives fiduciaries to plan participants in some cases. More than likely this continued focus may lead some advisors to stop offering participant education all together while some plan providers may start to offer more comprehensive participant advice.
  3. You may be forced to change advisors                                                                         With the potential shrinking of the number of financial advisors in the business, your plan may find that you are forced to change advisors. Additionally, some broker-dealers are becoming more restrictive in the type of professional that they allow to work on retirement plans. For instance, a broker-dealer may require their advisors who work on retirement plans to earn certain industry designations that reinforce the advisor’s ability to serve in a fiduciary capacity. The Accredit Investment Fiduciary® (AIF®) offered through FI360 and the Certified Plan Fiduciary Advisor (CPFA) offered through the National Association of Plan Advisors (NAPA) are just a few such designations. In any case, it is critical that the plan sponsor understands their advisor’s qualifications.

If you are unsure if any of these unintended consequences may impact your plan, please give me a call at 205-970-9088 or send me an email at