What Does the New DOL Fiduciary Rule Mean for You?
The Department of Labor’s fiduciary rule requires all financial professionals advising on retirement plans to act in the client’s best interest — not their own. Here is what that means for annuity buyers and retirement savers.
From Suitability to Best Interest
After many years of deliberations and public hearings, the Department of Labor (DOL) implemented a fiduciary rule requiring all financial professionals who work with retirement plans covered by the Employee Retirement Income Security Act of 1974 (ERISA) to be held to a fiduciary standard.
Previously, the standard was suitability: an investment recommendation was appropriate as long as it met the client’s stated objective, regardless of whether better or cheaper options existed. Commissions and fees paid to the advisor were largely irrelevant as long as they were not excessively high. This created an environment where advisors could legally recommend higher-commission products over equivalent lower-cost alternatives.
The new fiduciary rule closes this gap by requiring advisors to act in the client’s best interest without any self-dealing or conflict of interest. With over $24 trillion in US retirement assets — including more than $7.5 trillion in IRAs — the extra fees under the old suitability standard were conservatively estimated to cost investors more than $20 billion per year.
Legal Definition
A fiduciary is a person entrusted with the responsibility to act in the best interest of another party — the beneficiary — without any self-dealing or conflict of interest. The fiduciary is assumed to have greater knowledge and expertise than the beneficiary and must always put the beneficiary’s needs first.
Practical Example
A stockbroker operating as a fiduciary sets aside all consideration of personal commissions when deciding which investment to recommend. The client’s needs drive the recommendation, not the advisor’s compensation structure.
Which Accounts and Advisors Are Affected
The DOL fiduciary rule applies broadly to retirement accounts and the professionals who advise on them.
Retirement Accounts Under the Rule
The DOL fiduciary rule applies to defined contribution plans including all 401(k) plans, Simplified Employee Pension (SEP) plans, savings incentive match plans (SIMPLE IRA), employee stock ownership plans, and 403(b) plans. The rule also applies to all traditional defined benefit plans and to IRAs. After-tax investments held in standard brokerage accounts are not covered.
RIAs and Fee-Only Advisors
Registered Investment Advisors (RIAs) and fee-only financial advisors experience little practical change from the rule because they were already operating under a fiduciary standard. Their compensation is not tied to product commissions, so the conflict-of-interest risk the rule addresses does not apply to them in the same way.
Commission-Based Brokers and Agents
Securities brokers and insurance agents who receive the majority of their compensation through commissions face the most significant changes. Commission-based products can still be sold, but advisors must obtain a signed Best Interest Contract Exemption (BICE) from their clients, fully disclosing all forms of direct and indirect compensation in plain language before the transaction is completed.
Front-Loaded Funds and Some Annuities
The investments hit hardest by the DOL fiduciary rule are front-end loaded mutual funds, funds with 12b-1 marketing fees, and some forms of annuities. Many brokerage firms that offered these products have already adjusted their fee and commission schedules, with some eliminating all commission-based retirement plan options except self-directed accounts where the client makes all investment decisions.
Winners and Losers Under the Rule
The implementation of fiduciary standards is not uniformly negative for the annuity industry. Here is a realistic picture of who benefits and who does not.
- Self-directed investors who made decisions without relying on commission-based advisors
- Clients who receive annuity products that have been simplified to only include the most valuable features
- Annuity buyers who now have full fee disclosure in plain language before signing
- Consumers whose advisors are formally prohibited from steering them toward higher-commission products
- The industry long-term, as transparency builds consumer trust in annuity products
- Clients who relied on free guidance from commission-paid brokers may now need to pay advisory fees
- Brokerage firms that depended heavily on commission income to fund a large sales force
- Insurance carriers whose products carried complex fee structures that do not survive disclosure requirements
- Consumers who may find fewer commission-paid advisors willing to serve smaller account sizes profitably
- Short-term industry disruption as firms adjust compensation structures and product offerings
Frequently Asked Questions
1 Does the DOL fiduciary rule apply to my IRA? ▼
2 Can advisors still receive commissions under the fiduciary rule? ▼
3 How does the fiduciary rule change annuity products? ▼
4 What is the BICE and do I need to sign one? ▼
5 Does the rule cover my brokerage account outside of retirement? ▼
6 How do I know if my advisor is acting as a fiduciary? ▼
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