The Department of Labor is extending its grace period for those working to comply with the fiduciary rule that was passed in the final weeks of the Trump administration.
While the rule on exemptions for prohibited transactions went into effect in February of this year, the DOL originally assured fiduciaries that they had until Dec. 20, 2021, to be in compliance before the department would consider pursuing them for falling short.
But lobbyists and advocates contended the industry needed more time to comply with the rule, and the DOL responded by extending the relief period through the end of January 2022. Additionally, the DOL revealed it wouldn’t enforce the specific documentation and disclosure requirements pertaining to rollovers until the end of June next year.
“The class exemption provides meaningful protections for individual investors, and we continue to emphasize the importance of compliance,” Ali Khawar, the acting assistant secretary for the Employee Benefits Securities Administration, said in a statement about the extension. “Based on concerns raised, we’ve concluded that providing additional transition relief for financial institutions that are working in good faith to build systems to comply with the exemption conditions is appropriate.”
The rule, called “Improving Investment Advice for Workers and Retirees,” was originally proposed in summer 2020 (after a federal appellate court shot down the Obama administration's version of a fiduciary rule in 2018). Then-Sec. Eugene Scalia claimed the new rule aligned the DOL’s guidelines with the Securities and Exchange Commission’s Regulation Best Interest.
The rule allows fiduciaries to partially receive compensation from third parties when recommending certain investments if they adhered to a number of “impartial conduct standards.” Though some wondered whether the Biden administration would allow it to go into effect, the DOL announced it would in February and allowed the temporary enforcement guidance, which stated the DOL would not pursue enforcing the rule provided fiduciaries worked “diligently and in good faith” to comply with it, to remain in place through Dec. 20.
A number of industry groups, including the U.S. Chamber of Commerce, the Financial Services Institute and the Insured Retirement Institute (IRI) sent the department a letter in September urging the DOL to extend its guidance past the Dec. 20 date, arguing an extension would “reduce consumer confusion and disruption.” In its own statement this week, the DOL acknowledged the December expiration date created “practical difficulties” for institutions.
“These institutions have expressed specific concern that they would incur significant additional costs to distribute disclosures because Dec. 20 does not align with the regular distribution cycle for disclosures,” the statement read. “They also have asserted that the expiration date would make it difficult to conduct the required retrospective review on a calendar-year basis.”
The DOL noted institutions argued the rules on rollover recommendations were problematic and that they’d have trouble putting systems in place to adequately comply by the December deadline. In an earlier conversation with WealthManagement.com, Jason Berkowitz, the chief legal and regulatory affairs officer for IRI, cited rollovers as a concerning issue.
Berkowitz said advisors who recommended rollovers for clients from 401(k)s into IRAs would need to be able to show the contrasts between the options, but 401(k) disclosure statements aren’t necessarily accessible, and firms would need an automated tech solution in place. Otherwise, the DOL risked fiduciaries making a lot of “back-of-the-napkin” sketches for clients that would lack consistency.
“There won’t be as much ability for oversight within the supervisory structure to ensure that information is being presented accurately and appropriately,” Berkowitz said.
While the relief on the rollover requirements is extended through June 30, 2022, the DOL reiterated that relief on all other aspects of the rule ends as of Feb. 1 of next year.
