Retirement product providers concerned about the fiduciary rule's impact received some relief as the final rule no longer bans certain high-fee products in retirement accounts, as it had in an earlier draft.
However, any products sold to investors in their retirement accounts still must comply with the mandate that advisors put their clients financial interests before their own, says Timothy Hauser, a deputy assistant labor secretary.
Regulators allowed for annuities or nontraded REITs in retirement accounts, Hauser says, because they wanted to avoid the risk of clients taking heavy losses by exiting certain investments precipitously.
"We didn't want to create a rush for the door," he says.
An industry fear was that the rule would prohibit insurance companies from taking advantage of it's best interest contract exemption if they sell proprietary products such as variable annuities.
The DoL believes that these types of products make up an important part of the retirement marketplace. "Many people are looking for a steady stream of income," said Labor Secretary Tom Perez.
The fiduciary rule is not asking one insurance company to advise clients about the proprietary products offered by another insurance company, but they do have to have policies and procedures in place to make sure people understand that when they enter into a conversation with that company, there is a limited book of business that company sells, he added.
Even in that situation, the advisors are obligated to only make recommendations that are in a client's best interest.
"The standard is the same regardless of context. Make sure you are providing information in the client's best interest. That doesn't mean you have to recommend the lowest-priced car," said Perez.
"For different people, depending on their risk profile, depending on their age and the asset allocation they may choose, the issue of what is in their best interest will be different," he added.
"For some people, it may be that an annuity product is the right product. For others, a simple index fund is the best product."
The exemption will also be available for advice to small businesses that sponsor 401(k) plans, as well as for advice to IRA customers and plan participants. Also under the final rule, recommendations to plan sponsors who manage more than $50 million in assets will not be considered investment advice if certain conditions are met so they would not require an exemption.
'A BIG WIN'
Retirement plan industry experts are greeting the final fiduciary rule with a mix of caution and optimism.
Some are calling it a "big win" for 401(k) plan sponsors and participants and others are saying it has the potential to confuse employers and disrupt their ability to engage employees in retirement planning.
While the rule is "extremely good" for retirement plan participants and those who have IRAs, it may have the unwanted effect of confusing plan sponsors, says Matt DiGennaro, founder and CEO of Seabridge Wealth Management, adding it's now incumbent upon plan sponsors to consult with an ERISA attorney to ensure their 401(k) plan advisers are adhering to the rule.
"It's going to be incumbent on plan sponsors to reach out to an ERISA attorney-not their brokers, not their advisers, but someone who is independent and objective-and understand if their current broker or adviser is adhering to the new standards," he says, adding that he'd advise employers to contact an ERISA attorney within the next 30 days.
The American Retirement Association, a professional association of actuaries, pension plan professionals and retirement plan advisers, also calls the changes the DoL has made to the final rule "a big win" for 401(k) plan participants and sponsors.
In particular, the group is pleased with the rule's special exemption for advisers and firms that receive only a "level fee" for the advice they provide in conjunction with the decision to roll over assets from an employer-sponsored plan such as a 401(k), so long as certain conditions are met, including an acknowledgement that the recommendation is in the customer's best interest.
MUTED RESPONSE
The mutual fund industry's leading advocate, the Investment Company Institute, had a more muted response to the fiduciary rule.
"While we continue to believe that a best interest standard should be applied through legislation, it is apparent that the Department of Labor has revised its proposal in numerous ways," stated ICI President Paul Schott Stevens. "We are reviewing those changes to see if they address our concerns about the unquestionable negative impact of the original proposal on retirement savers.
"The rule is lengthy and complex, so we need to carefully review and analyze its details to understand fully how it will affect mutual funds-the nation's most important retirement savings vehicles-and the millions of fund shareholders who rely on them."
Perez scoffed at the notion that larger wealth management firms would stop serving small or moderate savers, saying there are plenty of advisors out there who have contacted the Department of Labor saying they would love to pick up that business.
Among that group are digital-first firms that have positioned themselves as low-cost alternatives for retirement savers and 401(k) plans.
"[It] was a pretty momentous occasion in financial services," said Christopher Jones, chief investment officer at Financial Engines. "I am excited about the impact this will have on the industry in the longer term, such as curbing some of the consumer-unfriendly practices that have existed for years."
Rob Foregger, co-founder of robo advisor for 401(k)s NextCapital, said the rule "is a major step forward for the modernization of the $17 trillion retirement industry."
"The DoL went to great lengths to integrate the productive feedback from the financial industry, while ensuring that a true fiduciary standard of care was enacted."
