THE NEW DOL FIDUCIARY RULE AND GOVERNMENT INITIATIVES. Marcia S. Wagner, Esq.

Transcription

1 THE NEW DOL FIDUCIARY RULE AND GOVERNMENT INITIATIVES Marcia S. Wagner, Esq.

2 Introduc*on Transforma*ve Changes Accelera3ng Pace of Regulatory Change Par3cipant investment advice rule Plan-level fee disclosures Par3cipant-level investment disclosures Proposals from Life3me Income Project Life3me income illustra3ons Longevity annui3es Watershed: new DOL fiduciary rule New fiduciaries Stricter compliance Rollovers become a fiduciary act 2

3 Agenda DOL Fiduciary Rule Regulatory and other Governmental Ini3a3ves 3

4 Broadening of Fiduciary Defini*on DOL s new rule would broaden scope of advisors deemed to be IRA/ plan fiduciaries Targets broker-dealers (BDs) and registered reps (RRs) earning commission-based compensa3on Would change IRA marketplace Would impact registered investment advisers (RIAs) Offering rollover advice Managed account programs 4

5 New Investment Advice Defini*on Required Context for Investment Advice Advisor acknowledges it is ac3ng as a fiduciary under ERISA or IRC, or WriZen or unwrizen understanding that advice is based on par3cular investment needs of client, or Advice is directed to specific person(s) regarding advisability of a par3cular investment decision Required Nature of Investment Advice Advisor makes a recommenda3on for a fee or other direct or indirect compensa3on 5

6 Recommenda*on Defined Covered recommenda3on to Plan/IRA On advisability of inves3ng in property, or Rela3ng to management of property including: IPS, strategies, por^olio composi3on Selec3on of other persons to provide advice Selec3on of account (brokerage vs. advisory) Transfers or rollovers from Plan/IRA Recommenda3on Reasonably viewed as sugges3on to engage in par3cular course of ac3on (i.e., call to ac3on) 6

7 6 Exclusions from Investment Advice Exclusions from Recommenda3ons Pla^orm Providers Investment Educa3on General Communica3ons Exclusions from Fiduciary Defini3on Sellers to ins3tu3onal fiduciaries Swap counterpar3es Plan sponsor employees NOTE: Exclusion does not apply if the advisor acknowledges its fiduciary status 7

8 Fiduciary Rule and Exemp*ons Need for ERISA 406(b) Exemp3on Relief New investment advice defini3on confers fiduciary status on all types of advisors Prohibited transac3on rules ban advisors from earning variable compensa3on (commissions) Exemp3on required for brokers and insurance agents, including advisors to IRAs. DOL has created Best Interest Class Exemp3on 8

9 Best Interest Contract (BIC) Exemp*on (PTE ) Scope of BIC Exemp3on Advisor can earn variable compensa3on (such as commissions for nondiscre3onary advice) Covered retail clients include: Par3cipants IRAs (and HSAs, Archer MSAs and Coverdell) Non-ERISA Plans (e.g., Keogh, Solo Plans) ERISA Plans (with less than $50 million) Observa3ons No relief for variable compensa3on arising from discre3onary advice. 9

10 Framework of BIC Exemp*on 4 Alterna3ve Versions of BIC Full Blown BIC for IRAs and Non-ERISA Plans Disclosure BIC for ERISA Plans Streamlined BIC for Level Fee Fiduciaries Transi3on BIC for 2017 Transi3on Period Observa3ons Firms could poten3ally rely on Full Blown BIC for all re3rement clients as of April 10, 2017 If feasible, it may be beneficial to use less onerous BIC versions for different client types 10

11 Full Blown BIC: IRAs and Non-ERISA Plans Required Terms for Contract Fiduciary standard of care General disclosures for compensa3on and conflicts Giving specific compensa3on figures upon request Compliance policies mi3ga3ng conflicts Mandatory arbitra3on with reasonable venue is permized (but must not limit class ac3on rights) Other Requirements Transac3on disclosures for each investment Focusing on fiduciary standards and conflicts 1-year relief if advising purchase of same product Webpage focusing on business model and conflicts 11

12 Disclosure BIC: ERISA Plans General Requirements mirror those for Full Blown BIC But no wrizen contract is required Must give wrizen statement of fiduciary status and general disclosures on compensa3on and conflicts List of Requirements WriZen statement and general disclosures Giving specific compensa3on figures upon request Webpage focusing on business model and conflicts Transac3on disclosures for each investment Webpage focusing on business model and conflicts 12

13 BIC Compliance Policies General Required for Full Blown BIC for Non-ERISA Plans and IRAs and Disclosure BIC for ERISA Plans Differen3al compensa3on paid from BD firm to rep must be based on neutral factors 3ed to services (like 3me or exper3se needed to sell investment) Expecta3ons DOL appears to be expec3ng BD firms to change their payout grids for reps For example, payouts to rep may vary for different investment categories, but not for similar investments in same category (such as VAs) 13

14 Streamlined BIC: Level Fee Fiduciary When Does a Level Fee Fiduciary Need BIC? Offering rollover advice to par3cipants when plan sponsor is exis3ng client, resul3ng in higher fees Offering rollover advice to off the street par3cipants Moving from commission- to fee-based services Streamlined BIC Requirements Advisor gives wrizen statement of fiduciary status Advisor documents (internally) reason for rollover recommenda3on being in client s best interest No need for compliance policies or other disclosures 14

15 Transi*on BIC: All Plan/IRA Clients Relief from April 10, 2017 to January 1, 2018 Beneficial for firms who cannot comply with Full Blown, Disclosure or Streamlined BIC by April 10 th Numerous BIC requirements are waived for transi3on period (un3l January 1, 2018) Simplified BIC Requirements Advisor provides wrizen statement of fiduciary status and conflict disclosures (electronic or ) Designa3on of person(s) responsible got monitoring compliance ( BIC Officer ) No need for compliance policies or other disclosures 15

16 Grandfathered Brokerage Transac*ons For Transac3ons Prior to April 10, 2017 BD firms and reps may con3nue to earn commission (variable compensa3on) Grandfathered transac3on must not have violated prohibited transac3on rules when ini3ally executed Compensa3on must be reasonable No grandfathering for new investments sold on or amer April 10, 2017 in connec3on with fiduciary advice Observa3ons Grandfathering rule is part of BIC Exemp3on rules Unclear if ongoing commissions are reasonable compensa3on if no future advice is given 16

17 Other PTEs PTE and Annuity Sales PTE (formerly Principal Transac3on Exemp3on) PTE

18 Fee Leveliza*on De Facto Exemp3on Fiduciary advisor is permized to earn transac3onbased compensa3on However, it must not vary based on investments selected by the plan or IRA client No need for exemp3on because fee leveliza3on eliminated prohibited transac3on to begin with 18

19 Implemen*ng Fee Leveliza*on Poten3al Areas of Variable Compensa3on Commissions and Ticket Charges, Revenue Sharing, Payments from Funds (e.g., sub-ta payments), Proprietary Products (e.g., sweep vehicle) How to Levelize Need appropriate universe of investment products that pay levelized amount (e.g., 50 bps) Restructure revenue sharing as flat dollar payments Replace proprietary products (or fee credit) 19

20 Robo-Advice What is it? Asset alloca3on advice based on computer models Rou3nely used for par3cipant-level advice and Recommending alloca3ons to plan menu op3ons Poten3ally available for IRA investors History 20

21 Capturing Rollovers Issues Arising From Cross-Selling Poten3al conflicts of interest Advisor develops rela3onship with plan sponsor and par3cipants Exploi3ng trust to sell at unfavorable terms Poten3al Impact on Par3cipants Advisor s fees on rollover assets may be higher than fees on plan assets 21

22 Effect of New DOL Rule on Rollovers Impact on Advisory Opinion A Would replace DOL s current rollover guidance Under new fiduciary rule, any rollover advice would be fiduciary advice Rollover advice would automa3cally trigger plan or IRA fiduciary status Relief under BIC Exemp3on Commission-based advisors need Full Blown BIC to earn compensa3on from rollover IRAs Fee-based advisors may also need relief under BIC Exemp3on when offering rollover advice 22

23 Poten*al Impact on RIAs Capturing Rollovers RIAs advising plan clients generally earn higher (and variable) fees when capturing rollovers May use Streamlined BIC as Level fee Fiduciaries for rollover IRAs Streamlined BIC may also be used when offering rollover advice to off the street par3cipants Retail Managed Account Programs Advisors earning variable compensa3on from IRA/plan clients must comply with BICE Solicitors would be fiduciary advisors and must also comply with BICE 23

24 Focusing on Managed Accounts Impact of DOL Rule Recommending investment manager may be deemed advice rela3ng to management e.g., 100 bps for managed account services -30 bps for Investment Manager #1-20 bps for other costs 50 bps net compensa3on Other Poten3al Variable Compensa3on Revenue sharing Commissions and 3cket charges 24

25 Implica*ons for Managed Accounts BIC Exemp3on May provide relief for managed account programs with variable compensa3on BICE does not provide relief for variable compensa3on arising from discre3onary advice Fee Leveliza3on Combina3on of BICE and Fee Leveliza3on may be necessary Restructure revenue sharing payments 25

26 An*cipa*on Trends in Industry Strategic Course of Ac3on Levelizing commissions and structuring revenue sharing as flat dollar payments More RRs migra3ng to advisory model Promo3ng advisory programs featuring ins3tu3onal mutual funds and variable annui3es Modifying managed account programs to rely on BICE and/or fee leveliza3on Support for Smaller Re3rement Accounts Reducing minimums for advisory programs Relying on Computer Model Exemp3on (robo-advice) to earn commissions 26

27 ERISA Compliance Planning What You Should Be Doing Right Now Iden3fy all products/services sold to Plans/IRAs Confirm firm has adequate supervisory control Iden3fy all instances of variable compensa3on Develop compliance strategies (BICE, PTE and Fee Leveliza3on with ERISA counsel) Timing Transi3on BIC will require disclosure and BICE Officer designa3on as of April 10, 2017 Full Blown BIC will require contracts for IRA and Non-ERISA Plan clients as of January 1, 2018 (nega3ve consent is permized) 27

28 Implementa*on BIC Exemp3on Toolkit Create model contracts for Full Blown BIC and model disclosures for Disclosure BIC Adopt model Transac3on and Webpage Disclosures Adopt compliance policies to mi3gate conflicts Consider changes to payout grid for individual advisors to limit differen3al compensa3on Develop system to ensure specific compensa3on figures will be available upon demand Provide training for advisors with regard to new fiduciary standard, BIC Exemp3on and firm s compliance policies 28

29 Strategic Use of Financial Plans Benefits Under New Fiduciary Standard Advice from commission-based advisors will need to meet new fiduciary standard Consider using financial plans to ensure recommenda3ons are in Best Interest of client Qualify financial plans by their nature can help demonstrate prudent advice Benefits Under BIC Exemp3on BIC compliance policies must address conflicts and variable compensa3on issues Requiring financial plans (before investments are recommended) can help mi3gate conflicts 29

30 Regulatory and other Governmental Ini*a*ves 30

31 Administra*on Push to Increase Access through IRAs Administra3on pushing automa3c IRAs: Mandatory for employers with 10 employees but no re3rement plan 3% default contribu3on rate Choice of tradi3onal pre-tax IRA or amer-tax Roth Employees allowed to opt out Mul3ple alterna3ves for selec3ng IRA provider Government designated default investments 31

32 myra Ini*a*ve myra Starter IRAs Starter program does not require legisla3ve authoriza3on Contribu3ons to Roth accounts Permits small investments ($25 / $5) Low rate of return from Treasury bonds Maximum $15,000 balance 32

33 How Re*rement Plans Affect the Deficit Impact of re3rement plans on federal deficit DC / 401(k) $61 billion (2015) $414 billion ( ) DB $42 billion (2015) $235 ( ) 33

34 Affect of Limi*ng Contribu*ons 2016 Plan limita3ons that can be reduced to limit deficit: Annual addi3ons from all sources - $53,000 Elec3ve deferrals - $18,000 Plan sponsor deduc3ons 25% par3cipant compensa3on Compensa3on limit to determine benefits/contribu3ons - $265,000 Limits proposed by Tax Reform Act of 2014 Freezes DC limits un3l 2024 $63.4 billion revenue gain over 10 years Addi3onal $144 billion from trea3ng half of 401(k) deferrals as Roth 34

35 General Limits on Exclusions and Deduc*ons Obama FY 2016 proposed $3.4 million cap on aggregate life3me contribu3ons Cap to vary based on age Double tax if prohibited amount not withdrawn Obama proposal limi3ng tax deduc3ons for plan contribu3ons 11.6% tax on employer & employee plan contribu3ons For high earners only Basis adjustment for extra tax 35

36 USA Re*rement Funds Proposal USA Re3rement Funds proposed by Sen. Tom Harkin Plan features: Automa3c/universal enrollment required by employers with no plan Regular stream of income star3ng at re3rement age No lump sum withdrawals Financed by employee payroll contribu3ons & government credits Privately managed investment by new en33es: USA Re3rement Funds Limited employer involvement; no fiduciary responsibility Unspecified level of required employer contribu3ons Employees can raise/lower contribu3ons or opt out 36

37 State Proposals State-managed plans for private-sector workers Intended to expand access to re3rement savings States would manage investments DOL clarifies preemp3on issue in regula3on California Secure Choice Mandatory auto-ira Pooled investments managed by state and guaranteed returns 37

38 Goals of Life*me Income Ini*a*ves Help re3rees take plan distribu3ons without outliving them Mo3vate re3rees to annualize accounts Re3rement paycheck for life Encourage plan sponsors to voluntarily offer annuity op3ons Permit longevity annui3es Remove regulatory hurdles Facilitate default annui3es Promote educa3on and disclosures 38

39 Current Fiduciary Standard for Selec*ng Annui*es Selec3on of Annuity Provider and Annui3es Subject to ERISA fiduciary standards Safe harbor: DC Plan Distribu3on Annui3es Procedural prudence Insurer s ability to pay Cost Draw appropriate conclusions Seek expert advice 2015 guidance Limit period for monitoring and statute of limita3ons 39

40 Promo*ng Longevity Annui*es New IRS regula3on relaxes required minimum distribu3on rules RMD rules mandate start at age 70½ but longevity annui3es provide income stream for later in life Final Regula3on provides: RMD excep3on for investment in QLAC Investment in QLAC capped at $125,000 or 25% of account QLAC payments to start no later than age 85 Applies to annuity purchases on/amer July 2,

41 DOL Proposal for Life*me Income Disclosures Advance No3ce of Proposed Rulemaking Life3me income illustra3on in par3cipant statements Must provide es3mated income streams based on: (1) current account, and (2) projected account at NRA Safe Harbor for Projected Account Assume 7% investment return Assume current contribu3on level, with 3% increase Use 3% discount rate to convert to current dollars 41

42 In Conclusion: Issues driving change Asset preserva3on Mi3ga3ng longevity risk Access to system Simplify proposed changes Avoid changes that downsize system Address systemic issues with incen3ves, not mandates 42

43 IMPORTANT INFORMATION This presenta3on is intended for general informa3onal purposes only, and it does not cons3tute legal, tax or investment advice from The Wagner Law Group. Financial advisors and other plan service providers should consult with their own legal counsel to understand the nature and scope of their responsibili3es under ERISA and other applicable rules. 43

44 THE NEW DOL FIDUCIARY RULE AND GOVERNMENT INITIATIVES Marcia S. Wagner, Esq. 99 Summer Street, 13 th Floor Boston, MA (617) A PPTX 44