A few weeks ago, President Obama announced that he was going to push the Department Of Labor (DOL) to announce a fiduciary standard for investment advisers to Qualified retirement plans (including 401(k) programs). Even before any rule had actually been proposed by the DOL, many in the financial services industry immediately went into a self-serving uproar to fight the idea. So what’s the hub-bub? Who’s right? Who’s wrong? Is it even that simple? (Foreshadowing on my opinion: conceptually Obama has it correct, and this is the right thing to do for American’s saving for retirement)
What is the concept of a “fiduciary standard” rule?
A fiduciary standard is the highest under law. In simplest terms, it essentially means there is a legal duty to put interest of plan participants ahead of their own in making plan decisions.
What are the real-world implications?
The fact there is a legal duty to participants means there can potentially be a breach of that legal duty, resulting in personal liability to plan fiduciaries. And forcing investment advisers to adhere to a fiduciary standard would, in turn, open them up to this increased liability. This is where the fight begins from the financial services industry
But isn’t acting in the best interest of participants just common sense?
Yes, in theory, but, legally, it’s more complicated than that. Here’s why:
Financial advisers can either act in a non-fiduciary commissioned “broker” capacity (where, in court of law, they would profess not to be a fiduciary to the plan), or as fee-based Registered Investment Adviser (RIA) role (sharing in the fiduciary duty). RIAs are in position of putting their money is where their mouth is: they are acknowledging a fiduciary role (and the inherent personal liability that comes with it)
The premise of what Obama has suggested would essentially force those in a “broker” role to either stop advising on Qualified plan assets – or to change their business model to that of RIA (and in so doing share in the risk) And clearly it’s this risk sharing that has created the uproar.
What is the financial services industry saying?
There’s any number of arguments or stalling tactics. Some want collaboration with the SEC on the regs. Others argue that by instituting this rule it will cause more brokers to cease serving Qualified plan clients and/or drive up costs – which in turn would cause small & mid-size businesses to abandon their plans, and leave their employees with no means to save for retirement.
Note: if these arguments sound a bit familiar, there are a lot of parallels between what’s being said today versus what was argued when fee disclosure regulations were proposed a few years back. And, yet, even when those fee disclosure regs were in fact implemented (in the best interest of plan participants), small & mid-size employers did not abandon their retirement plans.
So what do you guys think at JKJ?
The single biggest thing we find plaguing small & mid-size companies offering retirement plans is the fact they are working with generalist dabblers (typically in a “broker” capacity), whose focus is often on individual wealth management, personal financial planning, or life insurance. (We have blogged on this before: https://jkj.com/blog/retirement/generalist-vs-specialist-a-checklist-for-your-401-k/)
A fiduciary rule would force those practitioners to either step up to more fully commit to retirement plans (to the point they would be comfortable sharing in the personal liability risk that comes with being a fiduciary) – or, if they’re unwilling / unable to do that, those dabblers would need to get out of the retirement plan advisement business altogether, stepping aside to let a true specialist practitioners in a risk-sharing RIA capacity to step in.
None of this would increase costs nor cause companies to cease offering retirement plans. Reality is, most RIAs sharing in the fiduciary risk, and who have built the core of their practice around serving (and sharing risk of) retirement plans, do so at the same (or often lower) cost as compared to these generalist practitioners anyway.
Who would a fiduciary reg be bad for? Generalist individual financial advisers who dabble in the retirement plan space (and the broker dealers they are affiliated with)
Who would a fiduciary reg be good for? Plan participants – most importantly. And plan sponsors. Especially those in small & mid-size enterprises. And, yes, for RIAs who have chosen to truly specialize in the area of employer retirement benefits.
Author: Ben Hall, ChFC, AIF®
VP & Managing Director – JKJ Retirement Services