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Explaining New DOL Fiduciary Rules – Impact on 401k Plan Participants

If your company sponsors a 401(k) plan, you must read this.

The Labor Department has issued new rules for tax-advantaged retirement accounts. Potentially, they affect every 401(k) plan participant. They also impact IRA rollovers originating from 401(k) plans, and investment recommendations that may be made pertaining to any distributions from 401(k)s.

Under the new rules, any financial services industry professional who makes investment recommendations to 401(k) plan participants, 401(k) plan sponsors, or IRA owners in exchange for compensation will be considered a fiduciary under ERISA. A fiduciary is someone who accepts a distinct, legally binding obligation to manage invested assets in the best interest of plan participants and their beneficiaries.1,2

The Labor Department has expanded its definition of “fiduciary” to reduce chances of conflicts of interest affecting relationships between financial professionals and investors. In particular, it wants to diminish any potential conflict that may emerge related to the possibility of a commission from an investment transaction.

How will the new rules impact 401(k) plan sponsors & participants? Plan sponsors will have to decide if they want to provide participants with investment help amounting to education, or investment help amounting to financial advice.

The industry-wide move toward the fiduciary standard means that, in the near future, plan sponsors and participants may have to pay for investment advice, rather than receiving it for free as a component of a workplace retirement plan.2

Soon, many financial professionals may initiate fee-based advisory relationships with plan sponsors and participants. A fee-based advisory relationship is only fitting when a financial professional upholds a fiduciary standard; it diminishes the potential for conflicts of interest. In such a relationship, financial advice is provided only in exchange for an advisory fee. The fee may be hourly or per-project, it may be a quarterly or yearly retainer fee, or it may be an annual fee equivalent to a tiny percentage of account value.

Under the new rules, plan sponsors and financial firms may still provide basic education on retirement saving without assuming the role of a fiduciary. The presentation of plan information and general information on investing, personal finance, and retirement is not considered an offer of advice. So employees can learn how to enroll in a 401(k) plan, learn the basics about the types of investments offered by the plan vendor, and learn how much to save for retirement without the plan sponsor or the financial firm inviting fiduciary duties and liabilities.2

A recommendation to make a 401(k)-to-IRA rollover is now defined as a fiduciary act. One possible effect of this: more workers may leave money in their 401(k)s after leaving an employer.2

In the near future, if a plan sponsor or plan participant wants investment advice, investment appraisals, or investment management recommendations pertaining to an IRA or a 401(k) plan account, or regarding a rollover or distribution of assets from an IRA or a 401(k), one of two documents must be in place:

*A written agreement to a fee-based advisory relationship with a financial professional.

*A Best Interest Contract (BIC), in which a financial professional and a plan sponsor or participant agree in writing to a commission-based fee structure. Financial professionals who receive primarily commissions rather than fees commit to acting as a fiduciary through this contract. The BIC directs plan sponsors and participants to a disclosure website where both the costs of the financial advice offered and the potential conflicts of interest in the advisory relationship are disclosed.3,4

Fees are poised to rise as a consequence of the new rules, because insurance costs for financial services firms will be driven higher. Firms like ours will face an added compliance burden, and along with that burden, an increased possibility for litigation. Still, the financial industry has been transitioning toward a fee-based business model for years, and it is a business model that many investors have come to appreciate.

The fiduciary standard is scheduled to apply for plan advisors on April 1, 2017. The due date for updated forms, documents, contracts, and key participant disclosures that need to be legally reviewed is January 1, 2018.2

We welcome the chance to talk to you about all this. If you have questions or concerns, please call us at 217-337-5584 or email us at nate.lewis@rfsadvisors.com.

Securities and Advisory Services offered through Triad Advisors Member FINRA/SIPC

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world’s largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.

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1 – money.usnews.com/money/blogs/planning-to-retire/articles/2016-04-08/the-new-retirement-account-fiduciary-standard [4/8/16]

2 – shrm.org/hrdisciplines/benefits/articles/pages/fiduciary-rule-plan-sponsors.aspx [4/6/16]

3 – wealthmanagement.com/regulation-compliance/final-dol-fiduciary-rules-glance [4/6/16]

4 – dol.gov/ebsa/faqs/faq-conflict-of-interest.html [4/11/16]