A Fiduciary Standard for Retirement Plans?

Taking one giant leap forward to protect individual investors, the Department of Labor proposed new rules two weeks ago to ensure that financial advisors act solely in their clients’ best interests when investing for retirement. The newly proposed fiduciary standard would prevent stockbrokers, insurance agents and other financial professionals from choosing high-cost products and strategies if there are lower-cost options available for clients. That is, investments must be in the client’s best interests, not merely “suitable,” as the current standard for brokers requires.

That sounds reasonable, right? Not so fast. The fiduciary standard is far from a done deal. The United States Chamber of Commerce, which has long opposed the fiduciary standard, already plans to ask for an extension of the 75-day comment period. Other delay tactics most certainly wait in the wings. This is amazing when we consider what is at stake. A New York Times editorial in support of the Department of Labor’s new rules details the massive negative impact high fees and broker commissions have on investors. According to the Times, we’re talking about a staggering $17 billion a year in excess fees and commissions to advisors who steer their clients into “needlessly high-cost investments because they have no obligation to put the client first.”

Importantly, the new Department of Labor rule stress that advice is advice no matter who gives it. Mutual fund companies have long lobbied to exempt call center employees from any new fiduciary rules. In other words, if you called for “advice” on your IRA rollover, the person advising you over the phone would not be required to act in your best interests. Given that so many small investors handle rollovers themselves this caveat seems especially problematic, and certainly at odds with the insistence by those opposing the fiduciary standard that they believe it will hurt small investors.

In fact, the Times editorial points out that this new proposal by the Department of Labor responds directly to those who oppose the fiduciary standard because it will “upend commission-based business models that are more affordable for small savers than arrangements that charge a flat fee based on the size of the retirement portfolio.” Notably, this newest proposal addresses that concern by “allowing commissions and transaction-based fees as long as the adviser and the firm meet certain criteria.” The proposal requires financial advisors to simply “acknowledge their fiduciary duty in a written contract with the client.” Also, fees must be in line with industry norms and, as the editorial points out, a “firm’s policies cannot be at odds with the adviser’s fiduciary duty; for example, the firm cannot run contests that would give the advisers an incentive to steer the clients into higher cost investments.”

It’s tough to disagree with the conclusion expressed in the Times editorial, “Secretary of Labor Thomas Perez and his team deserve praise for a well-crafted proposal. Now they need to carefully vet the public comments and promptly issue a final rule that preserves the proposal’s strong protections for retirement savers.”


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