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DOL Fiduciary Rule Impact on non-ERISA Government 403(b) Plans
In reading the updated Department of Labor proposal for a Fiduciary Standard I became quite disappointed that non-ERISA 403(b) plans were left out (as are all non-ERISA government plans), but the more I've studied and talked with others I've become somewhat encouraged.
If the Fiduciary Standard becomes a reality it could fundamentally change the way 403(b) plans are serviced going forward. The change wouldn't be because an "advisor" has a fiduciary duty to the participant, it's likely they still won't, but because the "advisor" would have a fiduciary duty to the participant in the event of a rollover to an IRA.
Under the new rule any advisor advising a participant to rollover their assets from the plan would become a fiduciary to that participant and also any recommendation within the IRA would be subject to the fiduciary rules, this is a huge problem for the vast majority of advisors.
Currently, recommending a rollover to an IRA is not a fiduciary act, nor is the recommendation (ok, there is some debate on this, but generally the advisor has no fiduciary duty). If the rule change goes into affect and such advice becomes fiduciary in nature the advisor will find it nearly impossible to collect a commission for the recommendation. This has the industry completely freaked out.
The effect on the 403(b) will likely be to see fewer rollovers and more exchanges within the 403(b) plan itself. A recommendation to exchange one 403(b) product for another is not subject to the fiduciary rule, but a recommendation to rollover to an IRA is. To avoid a fiduciary duty you will see more money stay within the 403(b) umbrella instead of being rolled out and you will see 403(b) providers attempting to come up with new 403(b) products to be approved within school districts.
While I am not 100% happy with the current version of the Fiduciary proposal (I'd like to see some changes to the BICE contract and some additional flexibility on behalf of the service providers in communications) I am more encouraged than I originally was. It still doesn't cover 403(b), but it will affect the 403(b) and if these plans can be structured correctly, could fundamentally alter the landscape.
As I study and learn more I'll update you on my thoughts and correct any errors made in this initial analysis.