Important Information on the DOL Fiduciary Rule

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As a retirement investor, you may have come across the “DOL fiduciary rule.” A new ruling from the Department of Labor, it is scheduled to go into effect on April 10, 2017. But just what this rule means – and more importantly, what it entails for you and other retirement savers – may be less than clear.

In short, the DOL fiduciary rule expands the definition of an “investment advice fiduciary,” as laid out in the Employment Retirement Income Security Act of 1974 (or ERISA). As we briefly discussed in another post on 401(k) rollover options, this elevates financial professionals to a new status, ethically and legally speaking. Those who are paid to give recommendations about retirement accounts will be treated as “fiduciaries” under the rule.

As a result, they will be obliged to put your interests as a client first. The rule will require they give recommendations in your “best interest” as a retirement investor. They will also need to disclose any potential conflicts of interest which could influence their recommendation when they provide you investment advice for a fee or other compensation.

For a brief rule overview and how it will bring change, read on for some critical, need-to-know facts. In our view, this ruling is generally speaking a positive step for consumer protection. It helps protect you and other hard-working Americans from financial professionals who act unethically, do not act in your best interest when they should be, or do not consider your complete financial position before making a recommendation. However, it’s unfortunate that this sort of advisor conduct should require government-imposed conflict-of-interest standards to be levied – financial professionals should always act in their clients’ best interest, period, without exception.

Some Possible Outcomes for the DOL Rule

There will be wide-sweeping changes to the industry, from capital investments by financial firms to move into compliance, as well as the business operational costs of maintaining compliance. As a result, in some ways retirement planning advice may be more costly to you and other retirement savers.

An important note: The DOL rule was published during the Obama administration; with the Trump administration coming in, there is a possibility of the rule being delayed past the April 10th deadline, being changed, or even being abolished.

Unwrapping the DOL Fiduciary Rule

As mentioned earlier, the definition of a fiduciary has been expanded from just financial professionals who give ongoing advice. Now it covers other professionals, including financial salespersons such as:

  • Securities brokers
  • Planners
  • Licensed insurance agents

For simplicity’s sake, let’s refer to financial professionals covered by the rule as advisors. Before this ruling, advisors who were paid a fee for services rendered were treated as fiduciaries (whether the fee was an hourly rate for advice given or a percentage fee based on account values).

In the future as fiduciaries, advisors must openly state all potential conflicts of interest. A conflict of interest is a financial incentive which a “reasonable person” believes could influence an advisor’s recommendation. Advisors must clearly disclose all forms of compensation, whether they are asset-based fees, commissions on financial product sales, revenue-sharing deals, fees for advice given, or other payment variations. There is no room to omit any potential conflicts of interest.

On the whole, any advisor who is paid for recommendations on retirement accounts must look at your complete financial picture. They have to follow specific guidelines to determine what is in your best interest, whether they are securities products-focused or not.

What Retirement Accounts will be Affected?

One of the biggest areas affected is advice relating to 401(k) rollover options. Even though the majority of consumers choose to roll over their 401(k) assets into IRAs, this doesn’t mean this is the best strategy for them. In the DOL fiduciary world, 401(k) rollovers would be more strictly scrutinized to make sure any rollover advice meets a fiduciary standard.

Now, remember how we had mentioned that recommendations for retirement accounts are the focus of the ruling? Here are the types of retirement plans covered by the rule, as also noted by Investopedia:

  • 401(k) savings plans
  • 403(b) plans
  • ESOPs (Employee stock ownership plans)
  • SEP plans (Simplified Employee Pension plans)
  • Defined-benefit plans like personal pensions or other plan-defined payment benefits
  • IRAs

The law doesn’t consider taxable accounts or accounts funded with after-tax dollars to be retirement plans. So those accounts do not fall under the auspices of the DOL fiduciary rule.

Impartial Conduct Standards and Other Key Parts

The DOL fiduciary rule has three core principles. These are called the “Impartial Conduct Standards,” and they specify the guidelines which a qualifying recommendation has to meet:

  • A recommendation must be in the best interest of a retirement investor, and without regard to the advisor’s interest, or their company’s interests (whether financial or something else)
  • It must not result in compensation in excess of what is considered “reasonable compensation” for the advisor and their company
  • A recommendation must include clear disclosures of all potential conflicts of interest – an advisor may not omit any conflict of interest possibilities or not give any statements that could be considered misleading

Commission payments are permitted under the DOL ruling. For qualifying recommendations of certain products like fixed index annuities, advisors are permitted to receive commissions under the “Best Interest Contract Exemption,” one of a handful of exemptions within the rule. In certain circumstances, an advisor will have to abide by these regulations in a contract with you, the product purchaser, called the “Best Interest Contract.”

A Quick Note about Advisor Commission Payments

In financial columns, DOL communications, and other materials, you may have seen “bad talk” about advisors being paid by commission. In fact, many financial articles are partial toward asset-under-management fees, or fee percentages based on account values. Some common points in these writings are that commissions may incentivize an advisor to recommend one product over another because it offers a higher commission rate, or that commission-based products are “too costly.”

While these possibilities exist, that doesn’t mean they are the norm. For one, many financial companies, including insurance carriers, have been changing their commission models to be more compliance-friendly for advisors.

Another point – there isn’t any one form of compensation which is the best. What compensation may be best for you to pay to your advisor will depend on your personal financial picture, what you need, and what product strategies will help you fill that need.

Consider this. If drawn out over a number of years, many commission-based financial products can turn out to be low-cost. For example, fixed index annuities. An industry-wide review of 150+ different, 10-year fixed index annuities found advisor commissions averaged out at 6.89%. A 10-year period is a standard contract and term in the annuity marketplace.

Over 10 years, 6.89% comes out to .69%-.7% per year. Many financial firms have annual asset-under-management fees of 1%-2%. On its face, the cost-per-year of commission payments would be lower. This isn’t to say that commissions are actually superior, it just reinforces that there is no one “best” form of compensation.

Common Questions about the DOL Rule

There are many questions which you may have, here are just a few of the common ones we have heard:

Do advisors have to be licensed for multiple investment types for best-interest recommendations? No, some advisors may focus only on securities products and others may focus only on insurance products like annuities. If their financial product is found not to be appropriate for a particular client, they would need to give a “non-recommendation,” or recognize the products they offer would be imprudent for that client.

Does the rule hold advisors responsible for how an investment recommendation performs and turns out? No, the rule is concerned with the advisor’s conduct during the period of recommendation. The advisor is obligated to be a fiduciary ethically and legally, and their recommendation should be in line with the client’s interest.

Are there circumstances that don’t count as a recommendation? Yes. As the Department of Labor has said, a recommendation is “a communication that most people would think is a suggestion that you take a particular course of action, such as buying a particular security in your retirement account or not selling a particular investment (Bold is added by us for emphasis).” Materials or situations with content that is for general investment or financial education are not considered a recommendation, for example.

You can learn much more about the DOL fiduciary rule and what it means for you as a retirement saver in this FAQ document released by the Department of Labor. We hope this is helpful to you in understanding how the rule may affect your retirement planning.

And just to reinforce, this rule may be changed, delayed, or even abolished by the Trump administration. We encourage you to watch the news for updates.

Need Personal Help and Guidance?

At, we believe that every person should have confidence that their financial professional is acting in their best interest. You have worked hard for many years and have made sacrifices to be ready for retirement. You should be able to enjoy these years without regret or fear. It’s our hope that you discover well-fitting safe financial strategies which equip you to meet your goals, needs, objectives, and other retirement preferences.

If you are ready to get started on planning for how to meet your retirement goals, can help you. You can connect with a financial professional, including ones adhering to a client best-interest standard in their practices.

Use our Find a Licensed Advisor section to connect directly with an independent financial professional, and to request a personal strategy session to discuss your needs and goals. And should you have any questions or concerns, call 877.476.9723.

Author: Ian

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