New DOL Rule: A Q&A For RIAs & Private Funds

The Department of Labor (DOL) has issued yet another new rule set to shake things up for financial professionals who assist investors with their qualified retirement accounts. Here’s a breakdown of the key points and how they might affect you:

Q: What’s the DOL’s new rule?

This DOL rule expands the definition of a fiduciary under ERISA — meaning that advisors will be held to a stricter standard of care when giving advice about retirement accounts, including IRAs and rollovers from employer-sponsored plans (like 401(k) plans).

Q: So what does this mean for RIAs recommending rollovers to the IRAs they manage?

Under the new rule, you’ll need to provide impartial advice that prioritizes the client’s best interests over your own. This means carefully justifying why it makes sense to roll over to an IRA that you manage and considering factors, such as fees (as IRAs often have higher fees than employer plans).

Q: Isn’t there a DOL exemption that allows rollovers under certain conditions?

Yes, there is. The 2020-02 exemption allows rollovers when you provide impartial advice and disclose all relevant information. However, the new rule’s broader definition of a fiduciary throws a wrench into things. Where courts had previously decided that the DOL had overstepped its authority and mandate, new rulemaking has expanded the definition — with the goal of putting the previously successfully challenged rule back into place. 

Q: How does the new rule impact private funds in IRAs?

The rule doesn’t explicitly exclude private funds. This creates uncertainty, as justifying a potentially risky private fund investment within an IRA under the new impartial advice standard could be risky.

Q: When does this new rule go into effect?

The rule is currently scheduled to take effect in September of 2024, though its implementation could be delayed or challenged in court.

Q: What should RIAs and private funds be doing now?

Here are some initial steps:

1. Stay informed — keep an eye on updates regarding the rule’s legal challenges and potential delays.
2. Review compliance procedures — make sure that your rollover processes comply with the current 2020-02 exemption. Be prepared to make adjustments if the new rule takes effect.
3. Focus on impartial advice — develop clear documentation that demonstrates how your rollover recommendations prioritize client benefits over your own.
4. Take caution with private funds — carefully consider the implications of recommending private funds within IRAs under the new fiduciary standards.

Remember: This is a developing situation. We recommend consulting with legal counsel who specialize in ERISA regulations, in order to position your compliance strategy to align with the latest developments.

Q: The rule seems complex. Are there any resources available to help me understand it better?

Absolutely! Here are some resources to get you started:

• DOL Website: The DOL website provides the official rule text and related information: https://www.dol.gov/general/topic/retirement/fiduciaryresp
• Industry Associations: Many industry associations offer resources and guidance to members. Check with your association for updates and webinars on the DOL rule.
• Legal Counsel: Our AdvisorLaw team specializes in ERISA regulations and can address your specific situation.

Q: I’m worried about the potential impact on my business. What are some strategies that RIAs can consider?

Here are a few approaches:

• Focus on existing clients — deepen relationships with existing clients, and demonstrate the value that you provide beyond rollovers.
• Consider using a service, such as Pontera, to manage your clients’ in-place retirement assets.
• Embrace transparency — clearly communicate the fees associated with both your services and the IRA, as compared to the client’s current retirement plan.

Q:  How can private funds adapt to the new environment?

Private funds can consider these strategies:

• Develop clear suitability criteria — establish clear guidelines for determining which clients might benefit from a private fund investment within an IRA, considering risk tolerance, investor profile, and investment goals.
• Focus on education — educate IARs and potential investors about the potential benefits and risks of private funds within IRAs.
• Partner with compliant RIAs — collaborate with RIAs who understand the new fiduciary standards and can effectively communicate the suitability of private funds to clients.

Q:  What are the potential long-term implications of this rule?

The long-term effects are uncertain. Here are some possibilities:

• Reduced Rollovers: The stricter standards might lead to fewer rollovers overall.
• Increased Focus On Client Needs: The emphasis on impartial advice could lead to a more client-centric approach to retirement planning.
• Potential Litigation: Challenges to the rule’s legality could lead to delays or modifications.

Remember: The DOL rule is a significant development, with the potential to impact financial professionals. By staying informed, adapting your practices, and seeking professional guidance, you can navigate this evolving landscape and continue serving your clients effectively.

DEFINITIONS: 

• ERISA: The Employee Retirement Income Security Act governs employee benefit plans, including:
  • Welfare plans: providing benefits like health insurance or disability.
  • Pension plans: providing retirement income through:
    • defined benefit plans: employer pays a set amount, based on years of service.
    • defined contribution plans: employees (and potentially employers) contribute funds that grow over time (e.g., 401(k) or 403(b) plans).
• Plan Assets: the money or property held for the benefit of participants in an ERISA plan.
• Plan Sponsor: the employer typically sets up the plan.
• Participant: an employee or former employee receiving benefits from the plan.
• Beneficiary: The person designated to receive benefits from a participant’s plan (e.g., spouse, children).
• Fiduciary: someone who exercises discretion or control over the management of the plan or its assets, or who provides investment advice for a fee. There are different types of fiduciaries, below are two important kinds.
  • Administrator: keeps records, files reports, and issues statements to participants.
  • Plan Sponsor: Has a duty to act in the best interests of plan participants.
• Fiduciary Duty: requires fiduciaries to act prudently and in the sole interest of plan participants. This includes avoiding conflicts of interest.

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