Whether existing IRAs would be grandfathered, and how a “best interest contract” would function after a proposed fiduciary rule is adopted, were among the top concerns among advisors participating in a recent information webinar.

The webcast is available on demand for financial professionals.

The presentation focused on the Department of Labor’s (DOL) proposed fiduciary rule, which was recently submitted to the Office of Budget and Management for review and is projected to be implemented early in 2017. The proposal would require financial professionals offering retirement advice to follow a fiduciary standard and enter into a best interest contract with investors.

Some top questions from advisors:

1. Are existing IRAs grandfathered under the proposed rule?

As the language of the rule has not yet been finalized, there were many questions based on the draft proposal published for comment by the DOL in 2015. Many advisors questioned how existing commission-based business, such as A-share mutual funds or variable annuities, will be affected.

Some of the questions raised included: “Will the DOL rule change apply to existing retirement accounts or only new accounts?” and “What is the anticipated impact of the DOL rule to existing accounts that may pay an ongoing trail commission, such as variable annuities?”

The proposed rule does contain a provision that exempts existing transactions. However, if an advisor had subsequent contact with an existing client after the rule is in place, that conversation would likely be considered advice under the new rule and a best interest contract would be required.

It is also conceivable that broker-dealer firms will have different guidelines and procedures around engaging existing retirement clients once the new rule is established, i.e., some may take a more conservative view than others).

2. What types of accounts and products are affected by the proposed rule?

Most advisors are aware that the proposed rule broadly targets retirement accounts, including IRAs. However, uncertainty exists regarding other retirement vehicles such as 457 plans and 403(b)(7) custodial accounts. Technically, government 457 plans and non-ERISA custodial 403(b) accounts are not directly affected by the proposed rule. However, rollovers both from and to IRAs and other qualified retirement plans would be subject to the regulations.

Also, uncertainty is evident around the use of various insurance products within IRAs. Variable annuity contracts, which are considered securities under federal law, would be subject to the proposed rule. However, non-variable products such as fixed annuities would be governed under existing rules.*

Lastly, the proposal prohibits the use of a best interest contract with several investment vehicles within commission-based retirement accounts, including non-traded REITs and other alternative investments. (Note that these types of vehicles could still be used within a level-fee account platform.)

3. What is the likelihood that the proposed rule could be delayed or suspended?

Since the rule was initially proposed, several legislative attempts originating in the House have been introduced to delay the proposal. However, even if there were sufficient support in the House, any legislation would be challenged in the Senate and would likely face a presidential veto.

Several advisors asked about the possibility of legal action that could delay the DOL. Specifically, is there a possibility that opponents of the rule could seek a court injunction from the U.S. Court of Appeals for the D.C. Circuit. Legal action would likely challenge the DOL’s authority in establishing new fiduciary rules around retirement accounts and IRAs. It’s likely that, once the final rules published, several legal challenges will materialize.

To the extent delays in the process push the implementation timeline out past mid-January 2017, this would pose a risk for the rule being implemented if the new presidential administration is not supportive of the measure.

Prepare now for potential new rule

Given the likelihood of a final fiduciary rule being implemented, financial advisors should consider reviewing their books of business to get a sense of its potential impact and start thinking, with guidance from their broker-dealer, about communicating these changes to affected clients.

* Advisors who make fiduciary recommendations can receive commissions for selling insurance products to plans, participants, and IRAs without committing a prohibited transaction under the current 84-24 exemption.


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