The Department of Labor (DOL) is proposing a new rule for individual retirement accounts (IRAs) that could have an impact on how financial professionals offer advice and charge fees in their IRA business.

The proposal requires that financial advisors who offer retirement advice must follow a fiduciary standard — putting their clients’ best interest before their own profits — when recommending IRAs to investors.

The rule would expand the definition of “fiduciary” status applicable when providing advice on retirement savings vehicles (including IRAs). According to current rules, there are a number of factors that must exist for a fiduciary relationship to apply. For example, the advice must be provided on a regular basis and act as the primary reason why the individual made the investment decision. The proposed rule broadens the definition of fiduciary to “any individual receiving compensation for providing advice that is individualized or specifically directed to a particular plan sponsor (e.g., an employer with a retirement plan), plan participant, or IRA owner for consideration in making a retirement investment decision is a fiduciary. Such decisions can include, but are not limited to, what assets to purchase or sell and whether to roll over from an employer-based plan to an IRA.”

Highlights of the proposal include:

  • Advisors providing fiduciary investment advice are not permitted to receive payments creating a conflict of interest without a prohibited transaction exemption (PTE). Examples of payments include commissions and revenue sharing.
  • The Pension Protection Act (PPA) provided an exemption that still would apply under the new rule. It allows advisors to receive compensation when providing advice on retirement accounts if the advisor is compensated based on a level fee arrangement or if the advice is based on a third-party, unbiased computer model.
  • In response to previous industry concern on prohibiting commissions and revenue sharing, the proposed rule creates a new exemption — a “best interest contract exemption” that would allow firms and advisors to receive commission and revenue-sharing payments. There are several requirements for the new exemption:

    • 1. Commits the firm and advisor to providing advice in the client’s best interest.

    2. The firm has to adopt policies and procedures to mitigate conflicts of interest.

    3. Any conflicts of interest and fees that may prevent an advisor from providing advice in the client’s best interest must be clearly disclosed.

  • The proposed rule also includes “carve outs” that distinguish retirement education from investment advice, such as information on asset allocation models (not including specific investments) as well as guidance on lifetime income strategies.

Firms and advisors will likely have questions about what type of compliance infrastructure will be needed to comply with the rule, especially the “best interest contract exemption.” There’s also likely to be concerns around potential legal liability when entering into a “best interest contract” with an investor.

The notice of the proposal launched a 75-day public comment period, to be followed by public hearings for the DOL to gather feedback before finalizing the rule. As the DOL will receive a range of comments, it’s conceivable that certain adjustments will be made before a final rule. There’s also no certainty that the rule will be implemented, although there appears to be more support from the White House for this latest effort to modify the fiduciary standard. In the current environment, it is likely that changes, if implemented, would become effective sometime in 2016.


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