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How the New DOL Regulations Impact 401(k) Plan Sponsors

Written by: Marty Shields

On June 9th, the Department of Labor (DOL) implemented the first phase of its new fiduciary rule.  The full regulations will go into effect on January 1, 2018.  The main purpose of the rule is to have all financial advisors act as a fiduciary on retirement accounts or get written approval from the client that they are okay with the advisor not acting as a fiduciary.  The rule applies to all IRAs and 401(k) plans but does not apply to brokerage accounts or 403(b) plans.  This regulation pushes the industry in the right direction of putting the clients interest first and not just doing what is suitable for a client which is a standard many advisors use with their clients.

Although the new regulations deal primarily with advisors, there are still aspects of the law that impact plan sponsors of 401(k) plans.  The primary area of impact is, the law clarifies for plan sponsors what type of guidance they might provide to plan participants could be viewed as acting as a fiduciary versus merely providing general information.  This is important because if a plan sponsor provides advice that is deemed a fiduciary recommendation, then they are opening themselves up to increased liability.

Secondly, although the new law pushes advisors to act as a fiduciary for the 401(k) plans they serve, there are still many “carve outs” or areas where they don’t necessary have to act as a fiduciary or where they can share this fiduciary responsibility with the plan sponsor versus having the plan sponsor fully delegate the fiduciary responsibility to the advisor.

The final area is, certain investments that are in place before the regulations are fully active in January may be grandfathered in so that they don’t need to meet the new rules.  It is also possible for financial advisors to have a plan sponsor sign a Best Interest Contract Exemption (BICE) that allows the advisors to continue receiving commissions on an investment and not necessarily act as a fiduciary.

In general, these new regulations move the industry in the right direction but as is if often the case with ERISA law, there is a great deal of complexity with the law and how it will be applied.

As part of a trustee’s fiduciary responsibility they should benchmark their plan’s offering, investments and costs every 3-5 years to understand the strengths and weaknesses of their plan and any changes that need to be made.  With these new regulations coming into place this year, this is an opportune time to benchmark your plan to better understand how the regulations will impact your plan.   If you have any questions regarding the new DOL regulations or benchmarking your plan, please feel free to contact our firm to discuss.