401(k) Plan Center

Your Primer on the DOL's Fiduciary Rule Proposal

Your Primer on the DOL's Fiduciary Rule Proposal

We've attached an Executive Summary covering the basics of the DOL's proposed rule on conflicts of interest in giving retirement plan advice. The new rule, designed to protect participants, seeks to define what advice will be subject to a fiduciary standard of care and under the purview of DOL enforcement.

The fiduciary standard means that advice has to be in the "best interest" of plan participants. The issue is that many advisors to retirement plans -- brokers, insurance companies, banks -- operate under a different, lesser standard of care called "suitability". Advice and recommended products have to be suitable, but don't have to be in the best available in the interest of plan participants. That leaves the door open to sell higher cost proprietary products which might be suitable, but not necessarily the best available or lowest cost for participants.

It also enables the current system of hidden fees and kickbacks paid to these companies and their sales people under the guise of "12b-1 fees" and "revenue sharing". Mutual funds on the plan menu may pay the 401k company, e.g. John Hancock or Fidelity, a kickback in exchange for being on the plan menu. In turn, the company pays a portion of that commission to the "advisor".

The easy solution, in our opinion, would be to reserve the use of the term "financial adviser" for professionals that operate under a fiduciary standard of care. Note the spelling of "adviser" which indicates that the person is giving advice as an SEC Registered Investment Adviser (RIA) under the Investment Advisers Act of 1940. Currently there is nothing preventing stock brokers, insurance sales people, bank reps, and financial planners, who receive commissions, and who operate under a different set of suitability regulations, from calling themselves financial advisers, financial consultants, etc.

Sales is a noble profession, but plan sponsors and consumers who are investing and saving for retirement would be less confused and better protected if they receive an up front disclosure saying, "I'm a sales person, I receive commissions and my advice has to be suitable for you, but I'm under no obligation to put your interests in front of my own, and I'm free to sell you substandard, higher cost products that pay me a higher fee." Armed with the facts, plan sponsors and consumers are then free to decide whether they want to receive advice from a sales person or a fiduciary adviser.

Read the Executive Summary....


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