New Fiduciary Rules For Retirement Plan Advisors

Tuesday, May 05, 2015 00:14
New Fiduciary Rules For Retirement Plan Advisors

Tags: 401(k) | fiduciaries | fiduciary standard | retirement plans

 After years of struggling with this issue, it appears that the Department of Labor has come up with its "final" version of fiduciary requirements for advisors to retirement plans. Simply put, the rules require the advisor to put the clients' best interests first. This seems straightforward, but there are a lot of exceptions that will leave the door open to commission-chasing "advisors."

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Why is this rule needed? According to the White House Council of Economic Advisers analysis, current abuses resulting from these conflicts of interest result in annual losses of about 1 percentage point for affected investors—or about $17 billion a year in total. (On a personal note, last week, I was shocked to see a client's 401(k) offering solely "A shares!")
Of course, implementing a hard line rule would cause havoc in the lives of commission brokers. What would they do with all of their existing 401(k) business? Would they need to create a new share class with lower fees that would equate to those charged by RIAs? Or would they opt to sell their 401(k) business to a low cost provider such as Vanguard?
Unfortunately, there's are a lot of loopholes. These carve-outs include:

Exemptions for brokers who sell to large plans possessing a degree of sophistication. (In other words, let the buyer beware.)

The "best interest" contract exemption applies when the conflicts of interest are disclosed. (Who reads the fine print?)

The "low fee" exemption allows sales of commission-based products as long as the lowest fee product in a given class of products is recommended. 

There is also an exemption for those advisors that are solely "order-takers." This exemption applies as long as the advisor doesn't provide investment advice. 

As you can see, the proposed rules seem more like window dressing than something with real teeth in it. Should you be inclined to submit a contract, you have until July 6th to do so. 

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