How the New DOL Fiduciary Rule Could Change Your 401(k)

The U.S. Department of Labor’s (DOL’s) fiduciary rule has been a subject of debate and revision for years. The rule’s latest iteration, proposed in 2023, aims to protect investors by ensuring that financial advisers prioritize their clients’ best interests when recommending retirement investments. Even while still under consideration, this rule has the potential to significantly impact how companies structure their 401(k) plans.

To better understand the DOL’s objectives, let’s start with some context. The Employee Retirement Income Security Act (ERISA) was enacted in 1974 to regulate retirement plans. ERISA established fiduciary standards as the basis for governing investment advice. Fiduciary standards demand that financial advisers provide the highest possible level of care when offering investment advice.

The DOL’s most recent proposed rule changes contain three main points to focus on:

1. Expanded definition of “fiduciary.” The rule broadens the category of those deemed to be “fiduciaries” under ERISA. This means more financial professionals advising on 401(k) plans, including rollovers, are legally obligated to put their clients’ interests ahead of their own.

2. Rollovers. The rule changes also include added scrutiny on rollovers, the process of moving funds from a 401(k) to an individual retirement account (IRA), because rollovers are often seen as points of vulnerability for investors. The new rule places stricter scrutiny on recommendations to roll over, aiming to prevent advisers from pushing rollovers that are not in the investor’s best interest.

3. Prohibited transaction exemptions. The DOL is also reworking certain exemptions that allow advisers to receive otherwise prohibited compensation, such as commissions, under specific conditions. These reworked exemptions include more rigorous requirements that companies and advisers must meet.

Companies will need to make some adjustments to their plans to comply with the new regulations. Many will need to increase scrutiny when choosing plan advisers. It will become essential for companies to perform a thorough background check on the financial advisers and firms they hire to manage their 401(k) plans. To avoid potential legal issues, companies must meet fiduciary standards .

Companies should also consider reassessing the fees associated with their plans, particularly if they rely on commission-based advisers. They may need to shift their plans’ fee structures to better comply with the fiduciary rule. In addition, they may need to make changes to their investment options by re-evaluating the range of choices offered in their 401(k) plans. Prioritizing options with lower fees or those less susceptible to conflicts of interest may be necessary.

Finally, companies may need to increase their efforts to educate employees about investment options, fees, and the importance of rollovers. This is important to ensure that employees make informed retirement-savings decisions. Heightened education and communication initiatives can be implemented to enhance the understanding of investment options and fees. Sound financial education can significantly impact an employee’s post-retirement finances.

It is important to stay informed about the proposed DOL rule changes, which are still under review and may undergo further modifications. Companies should keep themselves updated on the progress of the fiduciary rule and take steps to mitigate any issues that may arise.

Consulting with legal counsel is crucial to understanding the nuances and implications of the rule for your company’s 401(k), so seeking advice from legal professionals specializing in ERISA compliance is highly recommended.

Regardless of the changes in the rules, it is also essential to evaluate your company’s retirement plan proactively in light of potential changes. Assess your current adviser relationships, fee structures, and investment options. Examining whether your current service meets your needs could uncover issues whose solutions could have big impacts.

Maintaining open lines of communication with employees about any potential changes to the 401(k) plan is equally important. Ensure that they have access to clear explanations and resources to make informed decisions. The DOL fiduciary rule emphasizes prioritizing the financial well-being of retirement savers. By understanding the rule’s implications and proactively adapting their 401(k) practices, companies can foster a retirement savings environment that truly serves their employees.

Nathan Boxx, director of retirement services at Fort Pitt Capital Group, offers insight on how to choose the right plan for a comfortable retirement, Social Security benefits, and an overview of what happens when a small business owner retires (transferring or selling the business). 

From: BenefitsPRO