The White House and the U.S.
Department of Labor ("DOL") have released new information
concerning the DOL's highly anticipated proposal to revise its
fiduciary definition under ERISA. The DOL proposal has not yet
been published, but the Obama Administration has arranged this
coordinated release of information as part of its ongoing efforts to
promote the proposed rule change.
information concerning the DOL fiduciary proposal was circulated
through a newly released fact sheet from the White House as well as
FAQs posted on the DOL's website. As discussed in these
releases, the DOL proposal would indeed broaden the definition of
"investment advice," which in turn would broaden the scope
of advisors to plan clients who would be viewed as fiduciaries for
New Fiduciary Standard and Exemption. Under the proposed rule, advisors under the new
fiduciary definition would be required to put their client's best
interest first. However, the proposed rule would not require
advisors to eliminate their conflicts of interest.
Instead, the proposal would include a prohibited transaction
exemption that would merely require advisors to mitigate
their conflicts and also disclose them. The new exemption would
be "principles-based" (i.e. based on general
principles rather than detailed "rules-based"
requirements), providing advisors with the flexibility to adopt
appropriate practices and adapt them over time.
Although the applicable
releases do not explicitly reference the Investment Advisers Act of
1940 (the "Advisers Act"), based on the description of the
new fiduciary standard and exemption, it appears that the DOL
fiduciary proposal would impose a set of principles-based
requirements on advisors to plan sponsors and participants
that would be analogous to those found under the Advisers Act.
No Ban on Commissions or
Non-Fiduciary Education. The
applicable releases state that the DOL remains committed to ensuring
that all common forms of compensation, including commissions and
revenue sharing, would still be permitted under the proposal. Thus,
it appears that the new exemption under the DOL proposal would permit
the receipt of "variable compensation" so long as the
conflict is mitigated under the advisor's practices and fully
disclosed. The releases also state that advisors would continue to be
able to provide general education on retirement savings across plans
and IRAs without triggering fiduciary status. For example, when
providing guidance on the mix of stocks and bonds that a person
should have based on his or her expected retirement date, the advisor
should be able to provide such guidance in a non-fiduciary capacity.
Next Steps for DOL
Fiduciary Proposal. Although
the DOL proposal has not yet been published, Labor Secretary Thomas
Perez has informally stated that the proposed rulemaking is being
submitted to the Office of Management and Budget
("OMB"). Following a standard interagency review at
OMB, which is expected to be completed within 90 days, the DOL
proposal would finally be made available to the public.
CEA Report on Conflicted
Advice. In addition to the
releases described above, the White House Council of Economic
Advisers ("CEA") released a report analyzing the economic
cost of conflicts of interest. The report makes the following
advice lowers investment returns by roughly 1 percent annually.
- The aggregate
annual cost of conflicted advice for IRA assets is roughly $17
billion each year.
- A retiree
receiving conflicted rollover advice will lose roughly 12
percent if the savings are drawn down over 30 years.
The focus of the CEA report
suggests that the DOL fiduciary proposal will include significant
restrictions on advisors seeking to provide rollover advice to
participants. Presumably, the CEA report will be used to support the
DOL's required economic analysis for its proposed rulemaking,
quantifying the costs of conflicts and the expected impact of the
The White House fact sheet is available online
The DOL's FAQs are available online at:
The CEA report is available