As ERISA attorney and former head of the EBSA Bradford Campbell sees it after a little more than a week of study, advisors essentially have three options for dealing with the best interest contract (BIC) exemption in the DOL's final fiduciary rule:
- Use the level fee option in the BIC exemption (or so-called "BIC Lite"). This approach offers the easiest compliance and little legal risk, but may not be available where affiliates receive compensation.
- Use the BIC exemption in the rule, with variable compensation for both the advisor and the financial institution. This approach entails the most compliance issues and risk of a lawsuit.
- Use the BIC exemption, with flat compensation for the advisor but variable comp for the financial institution. This approach requires complying with the full BIC conditions, but is easier to meet the incentive condition and entails somewhat less legal risk than full variability.
Advisors may also be able to avoid the need for the BIC exemption by providing education, not advice, to participants; using computer model-based advice, or offsetting some fees.
Campbell, joined by Joan Neri, a fellow counsel at Drinker Biddle & Reath LLP, executed a deep dive into the BIC exemption at a workshop session at the NAPA 401(k) Summit April 17.
Better But Not All That Much
Campbell cautioned the packed room not to get too carried away with the current wave of enthusiasm over the many improvements in the final version of the rule. “Remember that the baseline here was a proposed rule that did not work,” he declared. “The final rule will work, but will require significant costs and changes.” He offered an example: “Disclosures have gone from impossible [conflicting with securities laws] to painful” – i.e., a financial institution must disclose on its website how it compensates advisors, and recruits and retains them.
At this early stage, advisors need to be patient as financial institutions work through the complexities of the 1,000-plus page rule. “You're going to see a lot of different approaches by financial institutions,” he advises. “Be patient; it will take a little while until you get answers you can implement.” And be prepared for some pretty big changes as well: “This rule will significantly distort the marketplace,” Campbell declared.