Are you invested in an IRA, 401k, 403b or Defined Benefit Plan? If so, good news! Have you noticed fees disclosure on your 401k or 403b statements, lower fees and the addition of low-cost index funds to your investment selection? I hope further improvements to retirement plans ironed out in 2016 in a 1,000+ page document will launch on on April 10, 2017: the Department of Labor (DOL) Fiduciary Rule. Although regulations and compliance can be burdensome to advisors, these DOL regulations help lift retirement plans out of “The Wild West” by mandating higher standards of fiduciary care (see explanation, below). But before you applaud, the timing and content is in doubt. What does that mean for your hard-earned retirement dollars?
Where we are now: The April 10, 2017 launch date for a new Department of Labor Fiduciary Rule affecting retirement plans could be postponed and/or diluted (“defanged,” as one journalist put it) under the current administration. US insurers, brokers and NON-Fee-ONLY advisors have been fighting the imposition of fiduciary standards for years (no surprise since the retirement plan market is a lucrative $25 TRILLION dollar market).
What is a Fiduciary standard anyway? What does the new Department of Labor Fiduciary Rule say about it? If implemented, the new Fiduciary Rule is designed to require a Fiduciary standard of care in retirement plans (note: some of this is open to interpretation). “Fiduciary standard” is a dry, abstract term that’s poorly understood by the public. Mere mention of it can put people to sleep. A “Fiduciary standard of care” essentially means that advisors/brokers/insurance companies handling retirement plans are required to put a client needs before their own needs. Here’s the thinking: if client needs are put first (advisors' needs put second) , fees generally decline on product sales, fewer products are sold and the quality of services to clients improves. Yes, regulations are cumbersome and compliance sucks a lot of time out of advisors, but it is a winning situation for clients. Every dollar saved by a client on unnecessary fees is one more dollar he or she can put toward retirement.
What about the lower “suitability of care” many retirement advisors follow? Currently, brokers, insurers and other retirement plan agents advising folks on retirement plans are given a “free pass” to apply a lower “suitability standard of care.” A “suitability standard of care” is less stringent than “fiduciary standard of care.” What’s in a word? A lot, as it turns out. The majority of retirement advisors can claim that products (A, B, C shares, annuities, etc.) are “suitable” for clients, even if the broker benefits more from the sale than the client (who may in fact be more harmed than helped by some products). A higher Fiduciary Standard of Care could help reduce the many examples of abusive and deceptive sales of retirement plans my clients were put into before we started working together. I'm particularly disgusted by some of the 403b plans offered school teachers and administrators. These folks are fleeced by insurance companies running retirement plans that are unattractive and expensive.
So what happens next? We don’t know. Will the Department of Labor (DOL) Fiduciary Rule be implemented or not? In my opinion, it would be a shame to dilute or postpone the DOL Fiduciary Rule because we Americans are facing a serious retirement crisis. Greater retirement savings is needed. Health and medical expenses have been inflating faster than core inflation for decades. Retirement is wonderful but less so if you run out of money along the way. And retirement can last a very, very long time (30+ years, in some cases). Adult children with aging parents have every reason to worry that their parents will run out of resources and need a financial boost from family.
The Fiduciary standard of care for retirement plans is just the start. Full disclosure: I’m a Fee-ONLY advisor. Like other Fee-ONLY advisors, we don’t sell products or split commissions, our fees are transparent and we practice a Fiduciary standard of care. While it’s not possible to entirely eliminate conflicts of interest in the financial planning and investment management industry, Fee-ONLY advisors (not to be confused with fee-BASED advisors) put the Fiduciary standard of care into practice every day and we work to minimize conflicts of interest. We do this when advising on both retirement and other investment accounts. However cumbersome new rules are to implement to enforce, the April 10, 2017 Department of Labor Fiduciary Rule is a decent step toward leveling the playing field currently tipped in favor of large insurers, brokers and advisors managing so-so retirement plans.
“The Wild West” makes for great Clint Eastwood movies, but Americans preparing for retirement shouldn’t have to put up with shady information, murky fees and shoddy standards of care. Attempts to postpone or defang new regulations won’t stop the trend toward improved standards of care in the retirement industry when pre-retirees realize the benefits of Fiduciary care in the retirement industry. For some Americans, these positive changes can't come soon enough.