Written by: Martin Shields, CFP®, AIF®
In 2017, the Department of Labor adopted a rule regarding fiduciary investment advice under the Employee Retirement Income Security Act (ERISA). The rule provided guidance on how financial advice must be given to participants in a 401(k) plan and guidelines an advisor must meet when transferring a client’s retirement account from either a 401(k) plan or another IRA to their management. This rule was put on hold after a 2018 court case, but the DOL recently reissued the rule to meet the court requirements and it has become effective in 2022.
There are two main parts to the rule, the first addresses fiduciary requirements for professionals who recommend investments to participants in a 401(k) or similar employer-sponsored plans. It requires investment advisors providing such advice to act in plan participants' best interest as fiduciaries. It does allow for exemptions for the advisor to receive compensation directly from the mutual fund companies in certain cases.
Plan sponsors of defined contribution retirement plans have a fiduciary responsibility to verify that any service providers they contract with to provide participants with investment advice are compliant with the new regulations—including advice offered by the financial services firm that administers the plan and acts as record keeper.
Plan sponsors' fiduciary oversight includes understanding how and by whom investment advisors are being paid and whether those payments could result in conflicts of interest.
The second part of the ruling refers to an advisory firm recommending that a client roll over their retirement plan assets into an account to be managed by the firm (including from a current IRA), this creates both a conflict of interest and a prohibited transaction if the firm will earn new or increased compensation.
There are exemptions to the rule but to receive them, the advisor needs to show that transferring the assets to their management is in the client’s best interest. This can be achieved by demonstrating that the client will receive added services (i.e., financial planning), lower fund expense ratios, tactical asset management or better client services.
Compliance with Impartial Conduct Standards is achieved by:
1. Providing investment advice that is in the client’s best interest.
2. Charging only reasonable compensation.
3. Making no materially misleading statements about the rollover and corresponding investment transaction(s).
4. Seeking to obtain the best execution of the investment transaction(s) reasonably available under the circumstances.
Further, the firm will need to provide a written fiduciary acknowledgment. This means it needs to provide a corresponding written disclosure to the client acknowledging that the firm and its representatives are fiduciaries under ERISA, the Code or both, as applicable. A written description regarding the services to be provided and the firm’s material conflicts of interest must also be provided to the client.
A plan sponsor should make sure that plan participants are aware that financial firms need to meet these requirements and the sponsor should make sure that the financial firm managing their 401(k) plan abides by these requirements. Please reach out to Bouchey Financial Group if you have any questions regarding the new DOL rule or the management of your 401(k) plan.
Bouchey Financial Group has offices in Saratoga Springs and Downtown Historic Troy, NY.