On June 9, the long-awaited revised “fiduciary rule” from the U.S. Department of Labor (“DOL”) went into partial effect and will be in full force as of January 1, 2018. After nearly a decade, and much political wrangling, the updated rule ushers in sweeping changes regarding the duties and responsibilities financial advisors and others owe their clients.
The fiduciary rule is actually part of the Employee Retirement Income Security Act (“ERISA”), which governs employer-sponsored retirement and health care plans and protects the money employees contribute to those plans. While it may seem that this just something those working in the financial services industry must know about, anyone who contributes to a company-sponsored pension or 401(k) plan or who maintains their own IRA should understand the new protections that the updated rule provides.
What the New Fiduciary Rule Means for Employees
In a nutshell, the rule stipulates that anyone providing investment advice has a fiduciary duty to act in the best interest of their client. This means the advisor cannot conceal a conflict of interest that would affect the advice they give, and, for the most part, cannot work on commission – i.e., being paid different amounts depending on which financial products they recommend. The rule replaces ERISA’s previous “suitability” standard that only required advisors to ensure a particular investment for a client was appropriate.
The rule applies to anyone who gives advice to an investor, including broker-dealers, investment advisors, insurance agents, plan consultants, and plan sponsors – whether they serve in an external or internal capacity. for example, someone in a company’s HR department who advises fellow employees about allocating the assets in their 401(k) might be subject to ERISA’s fiduciary rule. They would owe a duty to each employee to act in his or her best interest, and should not receive compensation that is dependent on which products an employee chooses.
The language in ERISalso draws a line between “investment education” and “investment advice.” The fiduciary rule would not apply, for example, if someone in the HR department provides information to an employee regarding investment or savings options or how to determine their personal risk tolerance. That type of assistance would constitute investment education, but if the HR representative made specific recommendations regarding financial products, that would be investment advice subject to the new fiduciary rule.
Fractious History, Future Political Uncertainty
From the outset, the DOL’s move to reform the ERISA fiduciary rule was, for some parties, controversial. Revisions proposed by the Obama administration in 2010 faced stiff opposition from the financial services industry over fears of increased costs and liability, and were later withdrawn. In 2015, President Obama made another push for the reform, stating “[t]oday, I’m calling on the Department of Labor to update the rules and requirements that retirement advisors put the best interests of their clients above their own financial interests. It’s a very simple principle: You want to give financial advice, you’ve got to put your client’s interests first.”
President Obama made good on his word. The DOL published the new rule on April 8, 2016, and Thereafter held four days of public hearings. Initially, these changes were to be phased in from April 10, 2017 through January 1, 2018. However, after taking office, President Trump ordered the DOL to “examine the Fiduciary Duty Rule to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice, and … [i]f you make an affirmative determination as to any [adverse effects] … then you shall publish for notice and comment a proposed rule rescinding or revising the Rule.” The order delayed the rule’s effective date to June 9, 2017. Even though it is now in effect, the rule will actually not be enforced – which some have questioned – until January 1, 2018. Nevertheless, as of that date, anyone giving financial advice, including internal HR staff, will have to act in a way that protects the interests of their clients.
The fiduciary rule, however, still faces significant political opposition. The day before it took effect, the House passed a bill called the Financial CHOICE Act, which attempts to roll back the Dodd-Frank Wall Street Reform and Consumer Protection Act and also kill the fiduciary rule. whether it will survive the Senate is highly uncertain. Additionally, House and Senate Republicans have introduced legislation specifically aimed at scuttling the rule. Many feel that the Senate legislation, in light of Democrats’ ability to filibuster such legislation, has very little chance of passing.
What Employees Need to Know Right Now
As an employee, you now have the right to expect that any financial advice you receive is given without any conflict of interest and in your best interest (as noted above, while the rule is in effect now, it is not actually being enforced until January 1, 2018). If There is a conflict, your advisor will be required to disclose it to you and must notify you if he or she is being paid on commission – though many advisors are likely to end that form of compensation, as it would expose them to liability under ERISA.
Moreover, the changes mean that employees who feel an advisor has acted against their best interest will have standing to bring a lawsuit under ERISA. The law gives employees the right to pursue litigation or arbitration, including on a class-action basis. Please consult with an experienced ERISA lawyer in our Financial Services Practice Group who can discuss your particular situation.