New Fiduciary Rule for Financial Professionals
Under prior law, most financial professionals were NOT considered a fiduciary under Section 4975 (c)(1)(E) and (F) of the Internal Revenue Code (the “Code”) , which provides that a fiduciary can NOT handle income or assets of a plan or IRAs in the fiduciaries’ own interest or receive compensation without violating the prohibited transaction rules of the Code. Thus, in dealing with retirement plans, including IRAs, financial professionals could receive commission compensation without violating the prohibited transaction rules. Violation of the prohibited transaction rules can disqualify the plan or IRA and can create harsh tax consequences. The prohibited transaction rule has been discussed in a prior blog. Now, under the new Fiduciary Rule introduced by the Department of Labor (“DOL”), effective April, 2017, all financial professionals will be considered a “fiduciary” and subject to the prohibited transaction rules. However, there are exemptions.
The Best Interest Contract Exemption (“BICE”) provides that financial professionals can receive commission (non-level) compensation, which would otherwise be considered a prohibited transaction under the new Fiduciary Rule, provided that the financial professional must (1) commit to acting as a fiduciary and (2) act in the best interests of their clients. What is surprising to probably many individuals is that, prior to the new Fiduciary Rule, financial professionals handling our IRAs or 401(k)s were not necessarily considered a fiduciary and not bound to act in the best interest of their clients.
The new Fiduciary Rule applies if the financial professional is (1) making a recommendation, (2) receiving a fee or other compensation (commission) either directly or indirectly and (3) giving advice to a “retirement investor” which includes plan participants and beneficiaries, IRA owners and retail fiduciaries of plans or IRAs (generally persons who hold or manage less that $50 million in assets and not banks, insurance carriers, registered investment advisors or broker dealers), including small plan sponsors.
ADVICE: If you are a financial advisor, then these rules are critical and can apply if you are giving advice on rollovers, etc. Thus, if you want to fit in the BICE and avoid running afoul of the prohibited transaction rules, then you must make sure that you are acting in the clients’ best interest and actually know your clients’ best interest.
Companies are already sending information to businesses to act as a fiduciary for a fee. This author JUST received correspondence regarding our company’s 401(k) plan with PAI which states that CoPilot Service will act as a fiduciary for $100 a month. The correspondence also states that “[y]ou aren’t required to hire a fiduciary or use the CoPilot service. You can choose to be responsible for your participants retirement outcomes yourself (that is a scary thought)… Unfortunately this model (current 401(k) fees) does not offer the fiduciary protection that is included with CoPilot and a growing number of financial institutions will no longer support this approach” (emphasis added).
So if you own a company which has a 401(k) plan and you are the named administrator, then are you responsible for the retirement investment outcomes? Does this mean the investment advisor is “off the hook”as a fiduciary because the owner is a plan administrator? These questions need to be discussed with your investment advisor.
WORD OF THE WEEK: Fiduciary is a term derived from Roman law and generally means such a person who holds a position of trust or a character analogous to that of a trustee, together with the scrupulous good faith and candor which the position of trustee requires. The fiduciary is invested with rights and powers to be exercised for the benefit of another person. Examples of a fiduciary are a trustee, an agent under a power of attorney and a personal representative.
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