Strike the bells! The Department of Labor’s (DOL) fiduciary rule is (as of now) dead. In early March 2018, the 5th Circuit Court of Appeals issued a decision that reversed the fiduciary rule which was finalized under the Obama Administration in April 2016. The decision claimed the DOL had overstepped its authority by expanding the definition of the word ‘fiduciary’.
Technically, this latest decision means the DOL won’t be enforcing the 2016 fiduciary rule. Still, this case is far from over. The DOL now must decide if it will continue its defense of the rule or not. If the department drops their defense a third-party consumer advocate, such as AARP, could petition to step in.
But before we get to that subject, let’s look back. We’ll discuss what the latest DOL fiduciary rule news is, what has happened with the rule so far, and what’s likely for it next.
The Fiduciary Rule – Explained
The DOL fiduciary rule states that all retirement-financial advisors are required to operate as a fiduciary. 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, would 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 a 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 rule was initially proposed on April 14, 2015. From there it was fast-tracked by then-President Obama. It was officially finalized by the DOL 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. Now, as previously stated, the fiduciary rule is, potentially, done.
Despite how it may seem, there’s still a possibility of the fiduciary rule being revived. This chance makes it impossible to tell what the lasting effects of this most recent update will be. In the immediate future, the first question that needs to be answered is whether the DOL will continue its defense of the rule, or not.
Again, an advocate such as AARP could step in to defend the rule if the DOL does drop out. But the DOL dropping the case would be a blow to the regulation’s defense. On a state level, the latest ruling may spur individual states to create their own fiduciary rules. Already, there are five states in the process of establishing new fiduciary standards.
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?
This latest bit of DOL fiduciary rule news leaves the topic even more unsettled than it already was. Still, even if the overturn of the rule sticks, there are many ways to protect yourself from subpar retirement advisors. Check back in at The Olson Group to see the latest DOL fiduciary rule news and other breaking retirement news as it surfaces.