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Graff: Meet the New Reality

“We can’t walk away from this. It’s not going anywhere.” American Retirement Association CEO and NAPA Executive Director Brian Graff captured the new environment ushered in by the Department of Labor in its final fiduciary rule. Graff opened the 15th annual NAPA 401(k) Summit in Nashville with a discussion of the rule and some of the most important ways that it affects the industry.

“We’ve got to recognize that today the DOL is America’s retirement sheriff,” Graff said. But, he also noted, “We are very much in the figuring-this-out mode.” ARA President Marcy L. Supovitz, in her remarks immediately before the session, expressed a sentiment similar to Graff’s frank assessments, remarking, “Now the emphasis shifts from ‘whether’ to ‘how.’

But the “how” is not what it could have been. NAPA President Joseph DeNoyior, as well as Supovitz and Graff, noted the role that ARA and NAPA had in making comments and influencing the DOL as it revisited and modified the rule when it was in its proposed form.

The NAPA PAC “made a difference,” said Graff, concerning the way the rule addresses rollovers, which he called “a huge issue for us.” When the rule came out,” he said, it was “very restrictive,” but that changed after “many, many meetings” and much other activity by NAPA PAC members. Among the results of that effort was that the DOL changed the rule to clarify what constitutes advice in the context of rollover compensation; another was the level fee funding exemption. “Critically,” said Graff, “as compared to the full best interest contract (BIC) exemption, this streamlined exemption gets you out of the contract requirement.”

Enforcement by Litigation?

Graff pointed out that the DOL “did a lot of things with the contract that improved it,” but also noted that the DOL left intact the ability of trial lawyers to pursue class action lawsuits. The full BIC contract is not under ERISA, Graff said — it is a contract under state law principles. As a result, “There’s going to be a cottage industry of lawyers who are going to be BIC arbitrators” and who will be looking to pursue class action lawsuits under the full BIC.

BIC or BIC Lite?

He also stressed the importance of the provisions that concern being a level fee fiduciary. “This is very important. The only thing that you can get in connection with the advice to the plan or the IRA,” said Graff, “is a level fee. There is no other remuneration beyond the fee.”

Graff said that he sees the rule’s treatment of rollovers as universal, noting, “This thing covers everything.” Still, he said that while all transactions are covered, it will take future guidance from the DOL to clarify how some of the details regarding how the rollover rules will be applied.

A key question a firm must answer, said Graff, is “Is it BIC? Or is it 'BIC Lite' (i.e., the rule's level comp exception)?” With the BIC, an advisor has more liability and more compliance costs, but also greater flexibility. With BIC Lite, there is less liability, less compliance costs, but also much less flexibility. Each community “must decide for themselves what makes the most sense,” he said.

Participant Education and Distributions

Another important matter, Graff noted, is plan education. As originally drafted, he said, the rule would have stopped advisors from providing important education “that connects the dots between what the plan provides and what the employee or participant needs.” But now “basically, it does a pretty good job of getting us to the place we were before.”

And the original rule did not allow an exemption for distributions of small 401(k) plans. This is another matter about which the ARA and NAPA testified. “Now if you want to use a full BIC on a 401(k), you are free to do so,” Graff said, noting that “we’re very grateful that they changed that.”