Skip to main content

You are here

Advertisement

Leadership Dives into NAPA’s Position, Approach on DOL Fiduciary Rule

Delegates at the 2015 NAPA D.C. Fly-In Forum got a deep dive into the organization’s position and strategy on the DOL’s fiduciary rule July 21, courtesy of members of the NAPA leadership team that developed them.

The focus of the discussion: the American Retirement Association’s comment letter to the DOL on the regulation, which was filed July 20 (our report on the letter is here). Setting the stage for a discussion of the thinking behind the points in the 29-page comment letter, Executive Director Brian Graff shared the team’s view on the prospects that Congress will step in and “slow down, defund or stop” the development and implementation of the rule. “The likelihood of a legislative ‘fix’ is not very high,” he said. Graff was joined by NAPA President Joseph F. DeNoyior, President-Elect Samuel Brandwein and NAPA’s Founding President (and American Retirement Association President-Elect) Marcy Supovitz.

While it’s conceivable that the House of Representatives might approve a measure halting the rule, Graff noted, Senate approval would require the support of at least six Senate Democrats. Even assuming passage in both chambers of Congress, though, President Obama would surely veto such a measure — an action that would require 67 votes in the Senate to override.

“Thus, from a practical standpoint, it make more sense to work with DOL” on key elements of the rule “to make sure they reflect advisors' perspectives,” Graff told the delegates. But that doesn’t mean that Congress won’t be part of the solution. “We want members of Congress to weigh in with the DOL on what needs to change” — a strategy that separately was suggested to Fly-In delegates by Sen. Jon Tester (D-Mont.) later in the day. That will entail NAPA members to reach out to their elected representatives in Washington — “our own version of a grassroots campaign,” Graff said.

So what in the proposed rule needs to change? Beginning with a 40,000-foot view, Graff cited three general areas in which the rule would have a negative impact:


  • IRA rollovers;

  • participant education; and

  • the small plan market.


More specifically, Graff listed four elements of the rule that NAPA and American Retirement Association representatives are working with the DOL on:

1. 'Level Comp to Level Comp' Exemption

"Why should plan advisors be treated differently than other advisors?" asked Graff. Under the proposed rule, unless compensation does not increase at all when a rollover from an employer-sponsored plan to an IRA occurs (which is uncommon due to the customized services typically provided within the IRA), advisors will only be able to help participants on the rollover if they first comply with a complex and cost-prohibitive “Best Interest Contract Exemption” (BICE). Subjecting a level compensation advisor to the BICE requirements effectively penalizes that advisor for engaging in the rollover transaction. This would put retirement plan advisors at a competitive disadvantage vis-à-vis financial advisers who had no previous relationship with the participant in the plan.

“If you’re a discretionary advisor, the BICE prevents you from working with participants in IRA rollovers,” Supovitz noted. NAPA’s solution to this problem, she said, is to create an additional “level compensation to level compensation” exemption that provides the participant with the information needed to make an informed decision and requires the advisor to document the reason the rollover makes sense for the participant — without burdening the plan advisor with all of the current BICE requirements designed to curtail conflicted advice.

Supovitz also noted three other areas in the proposed rule that NAPA is working to address:


  • Firm/advisor-level fees: NAPA suggests that only advisor-level fees should be taken into account. “Nothing at the firm level should matter” for purposes of the rule, she asserted, noting that other DOL rules have adopted that approach in the past.

  • Lifetime income solutions: Proprietary advice on lifetime income products should be allowed, Supovitz argued, perhaps at a lower fee.

  • 12b-1 fees: Under the proposed rule it appears that 12b-1 fees are not permitted, Supovitz said, noting that fiduciary advisors cannot receive fees from third parties, which would include 12b-1 fees.


2. Investment Education

“Plan-level versus participant-level education is a critical issue” for NAPA, Graff noted — and an area that’s perfect for members of Congress to weigh in on with the DOL. Under the proposed rule, mentioning specific fund names in any general communication to plan participants would be considered fiduciary advice at the participant level — even though the adviser has no knowledge of any participants’ financial situation.

“The rule’s restrictions on investment education will make participant education harder to translate into practice, and so less helpful to participants,” explained Brandwein. NAPA wants the ability for advisors to “provide asset allocation models that ‘name names,’” he said, such as linking segments of a pie chart to plan funds in that category — a practice that would be defined as fiduciary advice under the proposed rule, marking a reversal from the four safe harbors for investment education the DOL provided in Interpretive Bulletin 96-1. “The DOL has been receptive to our arguments in this area,” he reported.

3. Small Plan Market

NAPA is recommending that the final rule clarify that service providers with level compensation do not need an exemption, even if the level compensation is received from a third party, and that it should acknowledge that ERISA plans are already subject to fee disclosure rules and a robust enforcement protocol, so the BICE contractual obligations and disclosure requirements are simply not necessary.

“A lot of small-market plans are fueled by 12b-1 fees,” DeNoyior noted. “We’re telling DOL loud and clear that the level comp rule would have a negative impact on the small plan market, particularly by making plan less attractive to business owners,” who may drop their plans as a result. DeNoyior also noted that NAPA is working with DOL on the rule’s impact on employer stock within a plan and cash equivalent or money market funds.

4. Transition Period

Graff ticked off a long list of potential problem areas that are sure to arise as the industry prepares to comply with the rule’s eventual effective date, including repapering legacy plans, legal/compliance review, programming and plan design. Denoyior characterized the 8-month preparation/phase-in period that the DOL is reportedly considering as “just not enough,” and Graff suggested that the industry would need a minimum of 2 years to prepare for all the changes the rule would require.

The next step in the regulatory process is a series of public hearings on the rule during the week of Aug. 10, 2015.

Advertisement