According to the Fiduciary Benchmark’s analysis, what has changed under the new DOL standard is the obligation of a fiduciary adviser to a plan or IRA, whose firm (referred to as a financial institution) will receive variable compensation or third party payments.
“These advisers must rely on the Best Interest Contract Exemption (BICE), which requires the financial institution to warrant that its and the adviser’s compensation is reasonable,” Reish and Ashton write. “Other exemptions contain a similar requirement … For plans, this creates a dual obligation to make sure that compensation is reasonable. The plan sponsor retains its ERISA obligation to do so, and the adviser and the financial institution have the BICE obligation.”
Pertaining to IRAs, the analysis suggests the prohibition against an adviser receiving unreasonable compensation remains as in the case above, “but the obligation to make sure (and to warrant) that the compensation is reasonable is heightened under BICE (and other exemptions).”
According to Reish and Ashton, advisers will likely have to defend fees if challenged, but it is important to point out that the adviser’s obligation is actually to make disclosures, “not warrant that his compensation is reasonable.”
“It is still up to the plan sponsor to make the determination of reasonableness,” they conclude.
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