Understanding the DOL Fiduciary Rule

Financial regulations are constantly shifting. Some changes are more drastic than others and can have a significant impact on your investments and financial dealings. For instance, the Department of Labor’s (DOL) historic new Fiduciary Rule is geared toward saving what the government estimates is $17 billion in annual investing fees. The rule is currently slated to begin being phased in on April 1, 2017, with full implementation to be completed by January 1, 2018. The rule will change the status of any financial advisor who deals with retirement accounts to the level of fiduciary, meaning they are bound legally and ethically to certain standards.

What does the change mean?

This proposed change in status would mostly affect those that work on commission, such as brokers and insurance agents in the country’s $25 trillion retirement services market. What it does is hold these professionals to a much higher level of accountability with their clients, ensuring that any potential conflicts of interest and fees are revealed.

The rule specifically targets two areas. First, advisors must put their client’s best interests first. Previously financial professionals only had to ensure that investment recommendations met a certain level of “suitability,” meaning the investment met the client’s need or objective.

Finally, any financial advisor that wants to continue to work on a commission basis will be required to provide their clients with a disclosure agreement—the Best Interest Contract Exemption (BICE).

What could potentially delay implementation?

With the recent change in administration, there is always the possibility that previously established rules will be adapted, delayed or repealed. The DOL Fiduciary Rule is no exception. While the DOL has stated that it plans to move forward with the changes, many financial experts are adopting a wait and see approach to see how the new administration in Washington, D.C., handles the ruling.

Which retirement plans will be affected?

The DOL Fiduciary Rule applies only to financial professionals that work with retirement plans. The retirement plans that it includes are:

  • Defined-contribution plans, including 401(k) plans, 403(b) plans, employee stock ownership plans, Simplified Employee Pension (SEP) plans and savings incentive match plans (simple IRA)
  • Defined-benefit plans such as pension plans or those that promise a certain payment to the participant as defined by the plan document
  • Individual Retirement Accounts (IRAs)