The Department of Labor has taken a welcome step in protecting the retirement assets of workers with its proposed new fiduciary rule.
The rule, in effect, defines as fiduciaries all who provide investment advice to retirement plans such as individual retirement accounts and 401(k) plans, or their beneficiaries, and requires that the advice must be solely in the best interests of the beneficiaries.
This includes all money managers, investment consultants or advisers and brokers who are paid for providing those services.
The DOL describes such advice as including recommendations about rolling over assets during plan distributions or rebalancing, investment management recommendations, appraisals of investments, or recommendations regarding investment advice providers or asset managers.
The rule, if ultimately approved after a comment period, will please retirement plan executives as it should improve the chances that employees who take their retirement assets out of the sponsors' plans as lump sums will receive unbiased investment advice from their advisers.
While registered investment advisers who charge fees have been fiduciaries under ERISA when dealing with retirement accounts, brokers have not when the advice they provided was incidental to their stock and bond transactions. They were held to a “suitability standard” not a “solely in the best interest” standard.
Many plan executives have been concerned their plan participants get too much pressure to take their retirement assets as lump sums, and not enough impartial advice. A White House Council of Economic Advisers analysis found conflicts of interest result in annual losses of about one percentage point for affected retirement savers — or about $17 billion per year in total.
The proposed rule would require brokers to adhere to the fiduciary standard. This should improve the quality of the advice employees receive about taking their retirement assets as lump sums, and about how to invest it. They will now be less likely to receive conflicted advice from any broker or other adviser with whom they have a relationship.
They will be less likely to be pressured into taking lump sums and directed into expensive or inappropriate investments that benefit the adviser, such as high-priced annuities or risky investments that pay high commissions.
As a result, it is possible that more retiring employees will leave their assets in the sponsors' plans, where they benefit from institutional pricing and, indirectly, solid investment advice.
Brokers will still be able to be compensated through commissions if they sign a “fiduciary contract” with clients, committing themselves to providing advice that is solely in the clients' interests. This exemption is designed to assure that brokers, who provide advice to many middle-class investors, will still be able to service those clients.
The proposed regulation also makes clear that a 401(k) platform provider that “merely makes available” investment alternatives would not be considered a fiduciary. It also allows firms servicing employers' retirement plans to continue to provide investment education to participants, as long as they don't reference specific investment products.
It appears the DOL has walked a fine line between protecting retirement plan beneficiaries from conflicted advice from service providers and investment advisers, and preserving the ability of those who rely on brokers for advice to get that advice. But modifications to the proposal are still possible.
Plan executives who have concerns about this proposed regulation, or ideas to improve it and make its protections even stronger, should take advantage of the comment period to make their views known. n
