The Department of Labor passed a ruling in 2016 mandating that anyone who provides investment advice on 401(k) and 403(b) plans must act in the best interest of their clients. In practice, this means providers must get rid of fee structures that create conflicts of interest between the advisor and their clients (which include your employees).
While this is a giant step forward, the Department of Labor did make one concession to make it easier for the financial services industry to slowly adopt more ethical, consumer-friendly practices — the BIC Exemption.
The Best Interest Contract Exemption (the “BIC Exemption”) allows advisers and their financial institutions to continue receiving fees from the prohibited transactions list, such as commissions, 12b-1 fees, and revenue sharing.
Reason #1: Some 401(k) advisors — particularly 401(k) brokers — won’t want to let go of the commissions and revenue sharing, this will be the main reason why some will use the BIC exemption
Reason #2: Some companies won’t be able to afford to comply with the the Department of Labor fiduciary rule. Because some firms make a majority of their profits from getting commissions and trail payments, they simply can’t make their business work without charging what will be prohibited transactions.
The Department of Labor fiduciary rule goes into effect on April 10, 2017. So any investment recommendation on or after that date must either comply, or your 401(k) advisor must notify you of potential conflicts of interest they might have.
The bad news for consumers is your 401(k) advisor doesn’t need to notify you of conflicts of interest every single time it comes up, they will likely just need to show you a set of disclosures once. And the moment you agree to the BIC exemption, you’ve kept the door open for your advisor to continue to use commissions, revenue sharing, and other fees that create conflicts of interest between the advisor and your employees.
The other bad news is it is possible that any investment recommendation that took place before April 10, 2017 will be grandfathered into your plan, and won’t need to be pointed out to you or any of your employees. The conflicts of interests and prohibited transactions will stay there, until you ask your 401(k) advisor to remove them.
Either way, expect to see a flurry of activity in March 2017, as some 401(k) advisors push to get their clients to sign the BIC exemption.
The informed and up-to-date plan sponsor will do the following things to prepare for these disclosures and exemption documents:
Level fee fiduciaries. The 401(k) advisors that are independent and provide conflict-free advice. This means they don’t make more (or less money) depending on the fund you choose to invest in.
Look for an advisor that’s already an ERISA 3(38) fiduciary to find a level fee fiduciary that’s probably already following the Department of Labor fiduciary rule.
In short, by agreeing to the BIC Exemption, you are allowing your employees to have an advisor that is not necessarily motivated to act in their best interest.
If this is the case with you, our recommendation is to talk to other 401(k) advisors that are already ERISA 3(38) investment fiduciaries, and find out if another advisor can better serve your plan.
If your advisor currently charges commissions or uses other items on the prohibited transactions list (get a full list here), then they will likely end up raising the fees they directly charge both you and your employees.
Give your employees more than just a 401(k), join the movement.