The Department of Labor’s recent Conflict of Interest ruling, formerly labeled the Fiduciary ruling, has been passed and now investment companies now most act on this new regulation. However, as a plan sponsor to a 401k plan, these changes may happen under the radar and will affect the structure of your current plan set up. Below, we’ll highlight the ruling’s significant changes and common scenarios associated with them.
Changes May Happen – Even if You Don’t Agree to Them
The DOL’s ruling allows for current clients to be made aware of material changes of the financial advisor’s relationship to a 401k plan via negative consent emails. Meaning, as a plan sponsor, you’ll likely receive notice of structural relationship changes through email and a non-response to the email is considered acceptance of the changes. Plan sponsors should be on the lookout for emails like this and we encourage them to seek greater understanding of any changes being made to the plan. Keep in mind, these changes may drastically revise your previously agreed upon terms and services, and will likely be discreetly listed by your current advisor. We feel this will put the burden of understanding any changes and taking action on the changes on the plan sponsor.
Anyone Giving Financial Advice for Retirement Plans Must Act as a Fiduciary
A big win for plan sponsors is that financial advisors can no longer give advice to a 401k without acting as a fiduciary. Although rare, in the past some 401k plans had associated financial advisors who were not actually acting as a fiduciary to the plan. This type of relationship generally yielded self-serving advice to participants due to conflicts of interest and left plan sponsors with unnecessarily high liability.
What if My Plan’s Financial Advisor Wasn’t a Fiduciary?
You should receive notice, likely via email, that your financial advisor is now acting in your best interest. However, we anticipate that in this scenario your financial advisor will elect to use the Best Interest Contract Exemption or BICE. This exemption is an acknowledgement that your advisor will now be acting as a fiduciary, but will be using methods to collect payment such as revenue sharing and commissions which may still contain a conflict of interest. These items must be disclosed under BICE. This can get confusing, so allow us to summarize: BICE effectively communicates that your current advisor offers less than ideal products and services, but will do the best they can with the tools at their disposal.
However, as a plan sponsor, you do not have to accept the BICE for your 401k plan and generally speaking we think you should not accept it. It’s a subpar 401k solution and this would be a good time to go shopping for a new financial advisor to your 401k plan. Additionally, the fact remains it’s likely better that you seek out an advisor who was acting as a fiduciary before this ruling required them to do so.
What if My Current 401k Financial Advisor is Already a Fiduciary to the Plan?
This question boils down to what kind of fiduciary relationship your advisor has to the 401k plan. If the plan has a 3(21) relationship with the advisor (the most common) then the advisor does not exercise discretion and does not make final investment decisions. These types of relationships are eligible for the aforementioned Best Interest Contract Exemption. Again, we strongly encourage plan sponsors to review the details of the BICE and how it affects the current plan. As we’ve identified earlier, BICE is a loophole created in the DOL ruling to allow investment companies who use proprietary (read: high fee) funds, commissions, and revenue sharing as part of their services to a 401k plan to continue to use them. This is despite the fact that the DOL has identified these tactics as items that lead to less money in individuals’ 401k accounts.
As mentioned earlier, plan sponsors do not have to accept the BICE proposed by the investment advisor, but must take action to stop the BICE from going into effect. Our take is that when service with contracts update, like a new BICE agreement from your financial advisor, it’s probably a good time to review the terms of service with that advisor and then take the time to inquire about services, terms and costs from other companies, too.
If your advisor to the 401k plan has a 3(38), or full discretion, relationship to your plan, they are not eligible for BICE. The result of this is either no action needed to be compliant with the new DOL ruling or a restructured agreement with your financial advisor. If no action is needed that’s a good thing, as you’ve already successfully found an advisor who was operating as the DOL preferred before he/she was required to so.
If a contract needs to be restructured because your advisor cannot continue provided 3(38) services without the aid of a BICE agreement, that’s a red flag. You should seek greater understand of the changes made and, again, use this opportunity to look into the services of other providers.
Update Your Investment Policy Statement
Plan sponsors should update their Investment Policy Statement (IPS) annually, and with anticipated wave of changes likely showing up in their inboxes in the next few months this would be a good time to update the IPS. The IPS is the roadmap to a company retirement plan and should accurately reflect how the plan is being rolled out. The fallout from the DOL ruling will likely change how most plans are guided, so each advisor’s IPS should be adjusted appropriately.
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