Grandfathering with the DOL Fiduciary Rule - Answers Lead to More Questions

June 21, 2016

The grandfathering provisions in the Department of Labor (DOL) final fiduciary rule are not so clear-cut, and many of the answers lead to more questions.

There are many things in daily life that are pretty straightforward and self-explanatory. For example, when the traffic signal is green, you go; when your dog runs full speed at you with a ball in his mouth, you play; and when your wife tells you "nothing" is wrong, there most definitely is something wrong (okay, maybe not that last one). Unfortunately, the grandfathering provisions in the Department of Labor (DOL) final fiduciary rule are not so clear-cut, and many of the answers lead to more questions.
 

What Is "Grandfathering"?

In the context of the final fiduciary rule (read our overview), "grandfathering" refers generally to situations in which a financial advisor receives compensation for "pre-fiduciary rule transactions" and continues to receive an ongoing revenue stream for those products after the applicability date of the rule (April 10, 2017), while not having to adhere to a number of the final fiduciary rule's requirements (e.g., contract and disclosure requirements). 
 

When Does Grandfathering Apply?

The final fiduciary rule describes grandfathering as an "Exemption for Pre-Existing Transactions." Although the original proposed fiduciary rule was not entirely clear about the grandfathering provisions, the final fiduciary rule has shed some light on where grandfathering generally does and does not apply.

 

Where Grandfathering Does Apply

Where Grandfathering Does NOT Apply

  • Existing systematic purchase programs (e.g., automated contribution program established before the rule applicability date)
  • Exchanges of investments within a mutual fund family or variable annuity pursuant to exchange privileges or rebalancing programs established before the applicability date
  • Important Notes:
    • Additional advice on pre-existing investments after the applicability date must satisfy the prudence component under the "Best Interest Standard"
    • Compensation earned on grandfathered assets will be deemed reasonable 
  • New investments into pre-existing investments after the applicability date 

 

Still Uncertain When Grandfathering Does NOT Apply?

Although the final fiduciary rule provides some clarity about the grandfathering provisions, some of the answers the DOL provided led to even more questions, and might inevitably require guidance by the DOL. Below are some examples.

  • Definition of "Best Interest" and "Reasonable Compensation" Still Unclear
    Within the grandfathering provisions and throughout the final fiduciary rule, the DOL refers to a client's "best interest" and "reasonable compensation," but the rule is not clear on who exactly determines what the clients' best interests are or how to determine whether compensation is reasonable.
  • What "Changes" Preclude the Use of the Grandfathering Provisions?
    • Rebalancing changes: For instance, when rebalancing was established before the applicability date, but there are changes to the frequency of the rebalancing (i.e., monthly, quarterly, annually, etc.), does this still fall under the grandfathering provisions?
    • Salary deferral contribution and IRA contribution limit changes: Employer-sponsored plan deferral and IRA contribution limits may change as frequently as annually, but if clients increase their salary deferrals/contributions based on these changes, does this still fall under the grandfathering provisions?

 

These are just a few examples of some unanswered questions about the final fiduciary rule, and there are many other questions related to other aspects of the rule. We will continue to keep you posted as updates are provided and answers are found.  

If you have any additional questions, please feel free to contact Retirement Strategies Group at (800)722-2333, ext. 3939, or e-mail us at RSG@PacificLife.com.

 

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Chad is currently an Attorney Consultant for the Corporate Law Department at Pacific Life. Previously, he was a Senior Retirement Strategies Consultant, bringing more than 13 years of industry experience to his role and providing technical insights to our sales team and registered representatives on a variety of issues including IRAs, qualified plans, annuities, and estate planning issues.

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