On April 20, 2015, the Department of Labor (“DOL”) proposed regulatory changes that could have a widespread impact on the financial services industry. The amended rules are designed to protect the public from questionable retirement investment advice by requiring retirement advisers to follow strict “fiduciary” standards – putting their clients’ best interests before their own. However, the potential ripple effect of the proposed changes extends far beyond the realm of retirement advice.
Existing rules in this area were defined by the Employee Retirement Income Security Act of 1974 (ERISA), which was established at a time when professionally managed pension funds were the retirement norm. Over the past 40 years, however, self-managed investments such as Individual Retirement Accounts (IRAs) have taken over as the primary way to save for retirement – increasing the risk and impact that ordinary, middle class investors will be harmed by bad advice from retirement advisers tempted by hidden fees, back-door payments, and other conflicts of interest.
The proposed ERISA amendments, which are currently in a 75-day public comment period, include:
The proposed rule changes could affect a wide range of financial institutions with direct or indirect involvement in retirement-related assets, including brokers, insurance companies, and banks – just to name a few. Although the specific impacts are unclear and will likely be different for every organization, here are some examples of potential impacts:
Potential front-office impacts
Potential compliance and control impacts
Potential client impacts
Although the Securities and Exchange Commission (SEC) is also examining this issue and might offer different guidance, the DOL — spurred by the White House — has signaled an intent to move as quickly as possible. As such, firms should take action now to understand how the proposed changes are likely to affect their people, processes and systems – and to identify what will need to be done to achieve compliance. Firms can then help shape the final rule by communicating their issues, concerns and suggestions to the DOL, either directly or in concert with their industry associations before the 75-day public comment period comes to a close.