DOL Issues ‘Conflicted Advice' Proposal

By John Iekel • 4/14/2015 • 0 Comments

It’s been a long time coming, but after a nearly five-year odyssey the Department of Labor on April 14 unveiled a proposed regulation that redefines who a plan fiduciary is — and makes it clear that the Obama administration intends the rule to be a way to increase consumer protections for plan sponsors, fiduciaries, participants, beneficiaries and IRA owners.

Director of the National Economic Council and Assistant to the President for Economic Policy Jeff Zients and Secretary of Labor Thomas Perez at an April 14 press conference discussed the proposed regulations. 

“Today the Department of Labor is delivering” on President Obama’s February pledge to update what he called the “outdated rules governing retirement advice,” said Zients. “We clearly need to fix the rules of the road,” he added. Perez went further, speaking of the “corrosive power of fine print and high fees,” something the administration intends the proposed regulation to address. 

The proposed regulation defines who a fiduciary is as a result of giving investment advice to a plan or its participants or beneficiaries. It would treat persons who provide investment advice or recommendations to an employee benefit plan, plan fiduciary, plan participant or beneficiary, IRA or IRA owner as fiduciaries under ERISA and the federal tax code. It would expand the scope of that definition and would replace the existing regulations under ERISA and the tax code concerning the relationships to which that definition applies.  

The DOL also proposes new exemptions and amendments to existing exemptions from the prohibited transaction rules applicable to fiduciaries under ERISA and the tax Code that would allow certain broker-dealers, insurance agents and others to receive a variety of common forms of compensation that otherwise would be prohibited as conflicts of interest.  

Under the proposed rule, more advisors would be held to a fiduciary standard. At the same time, Perez said, “advisors can have considerable flexibility in how they will be paid, as long as they put their clients’ best interest above their own financial interest.” 

DOL proposes to provide this flexibility through a new best interest contract exemption, a legally binding contract between the advisor and the plan sponsor, plan participant or beneficiary, or IRA owner. Under these contracts, advisors and firms would be required to formally commit to acting in their clients’ best interest. 

Brokers and advisors would not have to invoke the exemption if they don’t have a conflict of interest. But if the firm or advisor has a financial interest, they would. They would then have to acknowledge that they are acting as a fiduciary and commit that they would: 

  • give prudent advice;
  • put the customer first; 
    charge reasonable fees; 
  • not mislead the customer; and
  • put in place policies and procedures to ensure nothing is put in place that would create an incentive for the advisor to provide advice that would not be in the customer’s best interest. 

An excise tax would be imposed on advisors and firms that violate the contract. 

Perez also identified what is not in the proposal. He said that it does not apply to:

  • appraisals;
  • valuations of stock held by employee stock ownership plans; and 
  • brokers who just take direct orders from customers and don’t provide advice.

He added that it would not end or ban commissions or limit access to financial education. 

Regarding rollovers, Perez said that “the same construct would apply if someone was rolling over their 401(k), for instance, if they were going from one job to another.” 

When asked if they thought the review period before issuance had been too short, Perez responded that “the most common comment we’ve heard is that it hasn’t been fast enough.”

Perez and Zients both acknowledged that “many financial advisors act in their clients’ interest.” Perez said that “it is a fair assumption that investment advisors have clients’ best interest at heart,” and said that for those who already say that they do, “this rule will simply codify what they’ve already done.” He added, “This rule is intended to provide guardrails, but not straitjackets.” In a further nod to advisors, he said, “we believe that the private sector is indeed best suited to deliver that advice. And we believe that advisors should make a good living giving that advice.” 

The administration has been setting the stage for the last two months. In February, the White House issued a report, “The Effects of Conflicted Investment Advice on Retirement Savings,” which estimated that “conflicted advice” costs American savers $17 billion each year. In testimony on Capitol Hill on March 17 and 18, Perez delivered a full-throated defense of the DOL’s effort to expand the fiduciary standard of care to financial service providers under the jurisdiction of the department. During the course of that testimony, he reiterated to the House that the DOL has clear jurisdiction to act in this area and would do so.

Public Comments 

There will be a comment period of 75 days after the proposal appears in the Federal Register. All comments received must include the agency name and Regulatory Identifier Number (RIN) for this rulemaking (RIN 1210-AB32). Persons submitting comments electronically are encouraged not to submit paper copies. Comments can be submitted to the DOL through these means: 

Federal eRulemaking Portal: Follow instructions for submitting comments.

E-mail: send an email to Include RIN 1210-AB32 in the subject line of the message. 

Mail: Office of Regulations and Interpretations, Employee Benefits Security Administration, Attn: Conflict of Interest Rule, Room N-5655, U.S. Department of Labor, 200 Constitution Avenue, NW, Washington, DC 20210. 

Hand Delivery/Courier: Office of Regulations and Interpretations, Employee Benefits Security Administration, Attn: Conflict of Interest Rule, Room N-5655, U.S. Department of Labor, 200 Constitution Avenue, NW, Washington, DC 20210. 

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