The Department of Labor (DOL) is finalizing a rule that will have major implications for investors and advisors.
In January, the DOL sent the proposed fiduciary rule to the White House Office of Management and Budget (OMB) for review, the last step before the rule is finalized. Under the rule, advisors who sell retirement savings products will likely be held to a fiduciary standard. This means that advisors of 401(k) plans and individual retirement accounts (IRAs) will need to adhere to new standards concerning conflicts of interest.
The Rulemaking Process
- The DOL published the draft fiduciary rule in April 2015 and solicited public comments on it.
- The DOL sent a revised rule to the OMB in January 2016.
- The OMB will consider the budgetary impact and review the rule for final approval. This usually takes about three months, but it could be completed in as little as four weeks, if expedited.
- Once approved, the OMB will send the rule back to the DOL to publish the final rule in the Federal Register, which we expect to happen in the spring. This gives the DOL eight months to fully implement the rule before President Obama’s term ends.
- When the rule is fully implemented, investment professionals working in the retirement investment market will be required to comply with the rule.
When the process is complete, advisors will likely be held to the fiduciary standard, meaning that they will be required to follow strict standard of care laws. They will have to avoid and disclose potential conflicts of interest, and act with full transparency.
In addition, the fiduciary standard will impose new requirements on advisors who charge commissions. This could encourage advisors to avoid commissions and charge clients fees based on the size of their investments.
The Securities and Exchange Commission (SEC) Will Create a Separate Rule
Under the Employee Retirement Income Security Act of 1974 (ERISA), the DOL has jurisdiction over employee benefit and retirement accounts.
The SEC is working on a rule for the broader investment industry, which it plans to propose after the DOL unveils its new guidelines for employee benefit and retirement accounts.