DOL Final Rule Finally Here

May 26, 2016
By: Chin Kim

After much suspense and waiting, the U.S. Department of Labor (DOL) released its Conflict of Interest Fiduciary Rule to ensure retirement savers will receive investment advice that is in their best interests.

Points to Clarify

The final DOL fiduciary rule is finally here, but before we dive into some of the specifics, I want to start by clearing up some of the common misunderstandings you may have heard about the rule.

First and foremost, the rule does not ban commission-based products. Within the Best Interest Contract Exemption (BICE), the DOL has stated that "the exemption makes clear that it does not ban commissions or mandate rigid fee-leveling (e.g., by requiring identical fees for recommendations to invest in insurance products as to invest in mutual funds)." The DOL is aware of the different types of adviser compensation practices that exist in the retirement marketplace.

Second, the DOL did not place restrictions on the types of investments that will be permissible as long as it is in a client's best interest. The proposed rule did limit the number of investment products that can be offered to retirement clients when the BICE is considered. Nevertheless, the DOL stated that "the final exemption does not limit the types of investments that can be recommended by Advisers and Financial Institutions."


Main Intent of the Rule

The final rule retains the same framework as the proposed rule, with certain modifications and clarifications. The final rule defines who is a fiduciary, resulting in the inclusion of more individuals to be considered fiduciary when working with clients' retirement assets. In addition, it includes exemptions that will allow advisers and financial institutions to continue receiving different forms of compensation, as long as they are willing to abide by the new standards.


Summary of Key Items of the Rule

Update to Fiduciary Definition Replaces the narrow five-part test for investment advice
Plan Types in Scope of the Rule ERISA Plans, IRAs, Health Savings Accounts, Archer Medical Savings Accounts, and Coverdell Education Savings Accounts
 
Clarification of What Is Not Investment Advice Education, general communications, platform providers, transactions with independent plan fiduciaries, swap transactions, and employees of company retirement plans
 
Highlights of Best Interest Contract Exemption (BICE) Changes
  • Elimination of the point-of-sales disclosure in the proposed rule (i.e., 1-, 5-, and 10-year projections)
  • Not requiring contract execution prior to an adviser's recommendations
  • Elimination of the limited asset list
  • BICE now available to small plans of all types
  • Grandfather relief as long as conditions are met
Highlights to PTE 84-24 Changes
  • Fixed indexed-annuity products will now fall under BICE
  • Clarifies what is compensation (e.g., does not include revenue-sharing payments, administrative fees, or marketing fees)
Key Dates
  • April 10, 2017: Applicability Date (compliance with Investment Advice Standards)
  • January 1, 2018: Full Implementation (compliance with BICE, Principal Transaction Exemption requirements) 


The document contains more than 1,000 pages, so it will take some time to review and digest the rules. As we go through the details and get more clarification on the specific sections of the rule, we will follow up with new blog posts to help you better understand these items.

Should you have any questions, please feel free to contact us directly at (800) 722-2333, ext. 3939, or send an e-mail to RSG@PacificLife.com.

 

Attachments / Links:

Picture of Chin Kim

Chin Kim leads the Retirement Strategies Group, as Assistant Vice President in the Retirement Solutions Division at Pacific Life. His core responsibilities includes sharing and supporting retirement strategies concepts through development of marketing materials and tools and leading the team members in the field and in the home office.

Pacific Life, its distributors, and respective representatives do not provide tax, accounting, or legal advice. Any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor or attorney.

Pacific Life is a product provider. It is not a fiduciary and therefore does not give advice or make recommendations regarding insurance or investment products.

Pacific Life refers to Pacific Life Insurance Company and its affiliates, including Pacific Life & Annuity Company. Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state. Each insurance company is solely responsible for the financial obligations accruing under the products it issues. 

Variable insurance products are distributed by Pacific Select Distributors, LLC (member FINRA & SIPC), a subsidiary of Pacific Life Insurance Company (Newport Beach, CA) and an affiliate of Pacific Life & Annuity Company. Variable and fixed annuity products are available through licensed third parties.

No bank guarantee • Not a deposit • Not FDIC/NCUA insured • May lose value • Not insured by any federal government agency