By: Tim Hayes Financial Advisor - posted in: Employers - Last updated Nov 29, 2018

Financial Advisor Blog

Articles are about big issues affecting readers, individual or corporate.

What the New Department of Labor (DOL) Fiduciary Rule Means to You

by | Employers


The 5th Circuit Court of Appeals ruled on March 15,2018 that the Department of Labor overstepped its bounds in creating the so-called fiduciary rule, parts of which went into effect last year. In general, the rule required that advisors and brokers charge clients the same fee no matter what product they offer them. The so-called conflict of interest provision.

DOL Fiduciary Rule Timeline

There is talk that the SEC and or FINRA both of whom regulate advisors and brokers will pick up the ball from the DOL and implement their own retirement advice rule. Some think these organizations because they regulate brokers and advisors are better suited than the DOL who governs retirement plans to apply a new standard.

The Original Rule

On April 6, 2016, the U.S. Department of Labor (DOL) issued the new Fiduciary Rule. There is a one-year grace period before the law goes into effect.

The financial services industry will most likely be happy with the final rule as some of the most unpopular provisions, such as restricting what products an advisor can offer a client were eliminated.

The Fiduciary Rule applies mostly to private sector retirement plans, such as 401(k)s, SEPs, SIMPLEs, and 403(b) plans that fall under ERISA. The 403(b) plans of public employees, such as teachers, are usually not covered by ERISA, so most of those plans are not subject to the new law. It will apply to them if they decide to roll over their 403(b) to an IRA. As all IRAs, Roth’s, traditional, and rollover IRAs fall under the new rules.

Q/A Financial Advisor Tim Hayes


The administration believes the rule is needed because conflicts of interest are causing 401(k) participants and IRA owners to pay higher fees, resulting in smaller account balances.

What do I mean by ‘conflicts of interest’? Well, sometimes an advisor might receive a bonus or benefits if they sell a firm’s proprietary products. This is no surprise, it is a business, but what is surprising is that these conflicts go on with retirement plans — given that ERISA forbids conflicts of interest.

The Employee Retirement Income Security Act (ERISA) was enacted in 1974 to make sure private-sector retirement plans get to run for the benefit of the participants. But ERISA stipulated that the prohibition against conflicts applied to advisors only on five conditions:

  1. The financial advisor must render advice as to the value of securities or other property;
  2. The advisor must do so on a regular basis;
  3. The advisor must do so under an agreement with the client;
  4. That advice will serve as a primary basis for the client’s investment decisions; and
  5. The advice is to be based on the particular needs of the investment or retirement plan.

That the advice must be given regularly and must be the main basis for the client’s investment decisions is what the DOL says is allowing financial advisors with conflicts of interest to provide advice without violating ERISA’s prohibition.

Plus, the DOL feels that the 1974 exemptions were put in place when there was no such thing as an IRA or a 401(k), and companies invested the retirement money for their employees. But now that people are responsible for their own investment decisions, new rules are needed.

For example, the DOL believes that people are being advised to roll over their 401(k)s into IRAs, when it would cost them less if they remained in the 401(k). Moreover, under the old rules, rollover advice never fell under ERISA guidelines, because the rollover happened once.

So the new Fiduciary Rule gets rid of the five-part test and replaces it with the requirement that advisors be paid the same no matter what kind of investment plan is used. If an advisor is paid differently according to each particular plan, then the advisor must sign a contract with the client pledging that they do what is in the customer’s best interest.

What does the new rule mean for you? If you have a 401(k), the advisor fees might come down. If you roll over the 401(k) to an IRA, the fees in the IRA should be identical to what they were in the 401(k). If they are not, then the advisor must pledge to do what is in your best interest.

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