New Department of Labor 401(k) Regulation

Copyright Daniel E. Winslow, FSA, CPA    April 11, 2016


On April 8, 2016 the Department of Labor published a new regulation 29 CFR Parts 2509 and 2510.


New Standard:  “the Adviser and Financial Institution must give prudent advice that is in the customer’s best interest, avoid misleading statements, and receive no more than reasonable compensation.”


Old Standard:  “Non-fiduciaries may give imprudent and disloyal advice; steer plans and IRA owners to investments based on their own, rather than their customers’ financial interests; and act on conflicts of interest in ways that would be prohibited if the same persons were fiduciaries.”


It is interesting that many in the 401(k) industry:

--fought this rule change for many years,

--believe they will need to change their business model substantially to be in compliance with the new standard.  

--worry that their 401(k) business might not survive the new standard. 


New Legal Risks

“In this way, the contract gives both the individual adviser and the financial institution a powerful incentive to ensure advice is provided in accordance with fiduciary norms, or risk litigation, including class litigation, and liability and associated reputational risk.”


The above sentence in the new regulation is a major concern to any business person who has any legal knowledge or experience with the U.S.A. legal system, particularly if their firm operated under the old standard.


Every employer with a 401(k) plan should be reviewing their compliance with this new fiduciary standard.  For a small business 401(k), generally the business owner signs the Form 5500 and is the plan fiduciary who is responsible.


Any hidden problems?

What fees are being charged to the employer and the plan participants?  What are the expense charges for all investments?  What commissions are being paid?  What hidden fees are suddenly not only an expense for the employer and employees but now a DOL compliance risk and employee class action legal risk?


Has the employer done a full due diligence?  Or simply trusted a “non-fiduciary” who may have given “disloyal advice”?


Has the employer read the 408(b)(2) disclosure?  Some 401(k) providers make it easy to read this disclosure of fees and other issues.  Other 401(k) providers make it hard to find and read this 408(b)(2) disclosure.   If the employer has never heard of or read this disclosure, that would seem legally risky under the new standard.


April 10, 2017

The new applicability date is April 10, 2017.  With the lead time required to make changes to 401(k) plans and implement the changes for all employees, this should be “top of the list” for employers with a 401(k) plan.


Registered Investment Advisors

Some Registered Investment Advisors should be in much better shape since acting as a fiduciary and charging reasonable level fees is already a key practice for them.


Broker/Dealers and Registered Representatives will probably have to make more extensive changes to their business practices.