Strike the bells! The Department of Labor’s (DOL) fiduciary rule is (as of now) dead. The Fifth Circuit Court of Appeals has denied two motions to intervene to defend the DOL’s fiduciary rule. AARP and three state Attorney Generals filed these motions, respectively.
Last week, AARP and the attorney generals from California, Oregon, and New York all filed motions to intervene to defend the fiduciary rule. The decision to deny these parties’ request to step in essentially ends the fiduciary rule.
But before we write the fiduciary rule’s obituary, let’s look at what happened with the rule so far, and what’s likely for it next.
The Fiduciary Rule – Explained
All retirement-financial advisors are required to operate as a fiduciary under the DOL fiduciary rule. A fiduciary is required to put their client’s needs before their own. Those operating as a fiduciary must avoid conflicts of interest and operate with full transparency. This transparency includes all plan costs and fees.
Advisors, if the rule were in place, have to have their clients sign a “best interest contract,” which requires any conflict of interest to be disclosed. According to the DOL, advisors must, “adhere to the best interest standard when making investment recommendations, charge no more than reasonable compensation for services, and refrain from making misleading statements.”
Under current rules advisors, insurance salespeople, and broker-dealers may act under the suitability standard if they choose. The suitability standard only necessitates an investment is considered suitable for a client, at the time of investment. Advisors who don’t operate as a fiduciary can use incentives such as quotas, bonuses, and prizes that may correlate negatively with overall plan performance.
DOL Fiduciary Rule Timeline
The DOL first proposed the rule on April 14, 2015. President Obama then fast-tracked the proposed rule. The DOL officially finalized the rule almost a year later April 6, 2016. Then on February 3, 2017, President Trump issued an executive order instructing the DOL to review and possibly rewrite the regulation.
The rule was delayed, initially, for 60 days on March 3, 2017. Later in June 2017, the rule was reopened for comment and delayed another 30 days. Finally, in August 2017, the DOL proposed pushing back the final deadline for compliance to July 1, 2019. Then, in March of this year, the 5th Circuit Court of Appeals issued a decision that reversed the fiduciary rule.
According to the court, the DOL had overstepped its authority by expanding the word ‘fiduciary.’ Now, the same Court of Appeals has denied two different parties the right to take over the rule’s defense.
The court’s decision to vacate the rule will take effect next Monday, May 7. And because their motions were denied, AARP and the states aren’t parties to the lawsuit. This decision means they also won’t be able to petition the Supreme Court to review the decision to vacate the rule.
The Labor Department can still petition the Supreme Court. But, the department only has until June 13 to do so. AARP and the states do have one last long-shot at keeping the fiduciary rule alive. They could petition the Fifth Circuit to overturn the denial of intervention. But, according to legal experts, the Circuit Court would likely see this petition as frivolous and overturn it.
What About You?
No matter what happens on the federal or state level, it’s important that individuals and families also understand what’s next for them. The elimination of the fiduciary rule could potentially have a negative impact on your retirement account. According to a 2015 study from the Council of Economic Advisors, conflicted advice was costing American consumers around $15 billion in retirement savings every year.
Under President Trump, there have also been government cutbacks at the Consumer Financial Protection Bureau. These cutbacks, in combination with the defeat of the fiduciary rule, could increase consumer risk. To combat this risk, it will be important to look for advisers and institutions you trust, and who will act as a fiduciary on your behalf.
In addition to doing your research before a meeting, there are certain questions you should ask of potential or current financial advisers. These questions, according to CBS News, include:
- Will you act as a fiduciary on my behalf?
- How are you compensated?
- Do you receive any type of compensation in addition to what I’m paying you?
- Are you dual-registered?
- Have you ever been cited by a regulatory or professional body for disciplinary reasons?
Even if the overturn of the rule sticks, there are many ways to protect yourself from subpar retirement advisors. Contact one of our retirement advisors today, to determine what all your options are.