How the New Department of Labor Rule Impacts 401(k) Plan Participants
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.
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Bouchey Financial Group, Ltd. [“Bouchey Financial”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, no portion of this discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Bouchey Financial. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Neither Bouchey Financial’s investment adviser registration status, nor any amount of prior experience or success, should be construed that a certain level of results or satisfaction will be achieved if Bouchey Financial is engaged, or continues to be engaged, to provide investment advisory services. Bouchey Financial is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Bouchey Financial’s current written disclosure Brochure and Form CRS discussing our advisory services and fees is available for review upon request or at www.bouchey.com. Please Note: Bouchey Financial does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Bouchey Financial’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please Remember: If you are a Bouchey Financial client, please contact Bouchey Financial, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.