The Trump Effect and Business: Fiduciary Rules
Gene Marks recently sat down with Mike Savage, retirement compliance manager at Paychex, to take a look at the Department of Labor's expansion of the definition of a fiduciary, particularly as it applies to those who provide investment advice on retirement plans. Watch their conversation now.
Gene Marks: Hey, everybody. My name is Gene Marks. I write, every day, for the Washington Post, and weekly online, for a bunch of other, different places. I am here with Mike Savage. Mike, you are a manager of retirement compliance?
Mike Savage: Correct.
GM: Did I say that right? For Paychex. So your job is to know all things affecting your customers' retirement plans and such. One big thing that affects a lot of us are these fiduciary rules. What is that? Just tell me. So the deal – More regulations that we have to deal with. Is that right? More regulations.
MS: It's probably changing, right now, as we're talking –
GM: Yeah, of course.
MS: With all the ambiguity in DC. But so the fiduciary rule was something that was proposed by the DOL to expand the definition of what a fiduciary is, and to, potentially, eliminate conflicts of interest. And throughout the past few years, that's gone through different iterations. And it became applicable in June of this year, but just a portion of it, so the expanded definition of a fiduciary. So that brought into the definition far more investment advisors than it had in the past.
GM: So wait, so fiduciary rules, like, if I'm a business, a small business, that means that we have a 401(k) plan, we have a retirement plan, we have whatever. I'm a fiduciary, I guess, of that, right? So this affects me.
MS: Correct. If you're the sponsor of the plan, you're a fiduciary. But this really applies more to the folks providing investment advice to the plan, so it's an investment advisor or financial advisor. So it could be a broker-dealer, or registered investment advisor, anybody who is providing advice or recommendations on the investments of the plan.
GM: Got it. And what kind of requirements does it put on them?
MS: It requires them to –
GM: Make sure that we get a 10% return on investment, every year, right?
MS: Exactly, yeah. They guarantee you that, every year. So what it requires them to do is adhere to some impartial conduct standards. So they have to ensure reasonableness of fees. They have to ensure that there's no misleading statements, and that they're taking their client's best interest in mind, when they're giving these recommendations. So that's kind of the spirit of the rule, right now.
GM: How do they do that? Do they have to put this in writing, now, in their contracts? And should I be aware of that, when I'm hiring them?
MS: Yeah, it's kind of a partial compliance with the rule, now, as of June 9. And then full compliance with the rule goes into effect 1/1/2018. And that requires more contractual arrangements to be in place, more disclosures and notification requirements, by 1/1/2018.
So the DOL has given the industry time to comply with all of these changes in the regulations. And they're pretty onerous, and a lot of the service providers in the industry are having to do technology and system changes, even fund changes and share class changes that are pretty sweeping, and pretty disruptive for our industry. But the spirit of the rule is actually very sound, and a good thing.
GM: You know, it's funny, when I hear this, it's under the Trump presidency, his administration, its big emphasis is to reduce regulations that the government is putting on companies and businesses. And this kind of, sort of, flies in the face of that. Do you think this is going to continue? Is there any move, by the administration, to not have these rules take effect?
MS: It's a good question. So there's many proposed pieces, and potentially proposed pieces, of legislation, either to defund potential enforcement of the regulation, or to repeal it altogether. Actually, the DOL, right now, has a request for information out to the industry, to ask for comment on the pieces that aren't applicable yet. And that includes the actual 1/1/2018 applicability date of the best interest contract exemptions, some of the prohibited transaction exemptions. And it is also asking about provisions, like, there's a non-binding arbitration, which, basically, class action lawsuits, to potentially eliminate that provision from the rule, because we don't want this, really, to be tested in the court system. That's not a win for anybody. It just makes the products and services more expensive.
GM: Got it.
MS: So we think the core of the rule will remain, as far as expansion of the definition of fiduciary. And then taking clients’ best interests at heart, when giving recommendations on investments, that will stay. But some of the bureaucracy of the rule will probably start to fall off, and be repealed.
GM: That's good to know. And then just in our final few seconds, so if I'm a business owner, or if I'm a manager, if I'm an HR manager, why do I care about these fiduciary rules?
MS: Well, you care, if you're certainly, if you're the sponsor of the plan, you have a fiduciary obligation, too. You have a duty to monitor the service providers who are providing services to your plan participants, making sure that fees are reasonable, that the services are reasonable, and that you're really getting what you pay for, and you're not overpaying for it, and that all the decisions around the plan are in the participant's best interests. I mean, that's why the regulations were written, and it's prepared people for retirement. That's the spirit of it, yeah.
GM: That's great. Mike, fantastic information. Thank you very much.
MS: You're welcome. Good to see you again.