DOL's Fiduciary Rule Delay an Excellent Opportunity to Negotiate Stronger Indemnities

Comp & Benefits Alert | May.03.2017

The DOL's fiduciary rule has been delayed. This delay, and the confusion swirling around if and when the DOL fiduciary rule will become applicable, is giving plan sponsors a window of time to renegotiate their contractual arrangements with their 401(k) service providers relating to investment advice. This renegotiation should include a review, and a strengthening, of the service provider's indemnification for its fiduciary investment advice.     

Fiduciary Rule Delayed, but Not Dead Yet

On February 3, 2017, President Trump issued a memorandum directing the Department of Labor (DOL) to examine its final regulation on fiduciaries and investment advice, to determine whether it "may adversely affect the ability of Americans to gain access to retirement information and financial advice." The regulation was scheduled to become applicable on April 10, 2017. In order to give itself time to conduct this examination, the DOL has delayed the applicability dates of the final regulations and related prohibited transaction exemptions (Fiduciary Rule). 

June 9, 2017 – Expanded definition of fiduciary

  • Anyone who provides investment advice for a fee or other compensation 

June 9, 2017 – Impartial conduct standards portions of Best Interest Contract (BIC) and Principal Transactions Exemptions

  • Providing advice in participants' best interests
  • Charging no more than reasonable compensation
  • Avoiding misleading statements 

January 1, 2018 – BIC and Principal Transactions Exemptions (remainder)

  • Anti-conflict policies and procedures
  • Required disclosures
  • Enforceable written contract requirement (IRAs and non-ERISA plans) 

The Prospects

While the DOL is holding open all of its options to further delay, streamline or outright repeal all or portions of the Fiduciary Rule after its review, the tone of the DOL's discussion of the delay suggests that complete repeal is unlikely. In particular, because the expanded definitions of fiduciary and impartial conduct standards are the least controversial aspects—and in fact widely supported—of the Fiduciary Rule (although not universally so), they appear to have fairly strong support within the DOL as well as with investors. They provide investors, in the DOL's words, with "the protection of basic fiduciary norms and standards of fair dealing."  The DOL notes that these provisions are supported by its previous extensive review and findings of ongoing injury to retirement investors due to investment advisors' conflicts of interest. The 60-day delay of these provisions is only justified, in the DOL's view, by the investor harm and confusion that could have been caused by a hasty implementation of the rules on the original April 10, 2017 applicability date, when many investment advisors had been anticipating a delay and consequently were not fully prepared to implement the rules on April 10. 

In light of the president's directive, the DOL will take a harder look at the provisions of the BIC and Principal Transactions Exemptions that extend beyond the impartial conduct standards, and significant changes to these are possible. 

We note that the DOL reported that, out of the 193,000 comments it received on whether the Fiduciary Rule should be delayed, 178,000 opposed any delay whatsoever, and only 15,000 supported a delay of 60 days or longer (including indefinite delay or outright repeal). Of these 15,000, there were varying degrees of support for the expansion of the fiduciary and impartial conduct standards definitions.

What to Do Now

Because of the likely expansion of the definition of fiduciary, plan sponsors should accept invitations from, or engage service providers, to provide indemnification from fiduciary breaches.