In February, 2015, President Obama called on the Department of Labor (DOL) to update the rules and requirements that advisors operate under to protect America’s workers. The DOL Fiduciary Rule proposes that there be requirements that prevent financial advisors from giving clients advice that result in their own financial gain.
The findings of the White House Council of Economic Advisors (CEA) research have found that this self-serving financial advice has lead to millions of America’s workers and their families losing billions of dollars annually. The DOL estimates that the proposed changes would save them more than $40 billion over 10 years.
What is proposed by the DOL Fiduciary Rule
The push to require retirement advisors to put their clients before themselves is to apply to fiduciaries, which includes brokers and registered investment advisers – individuals who receive compensation for providing advice that is individualized or to a particular plan sponsor, plan participant, or IRA owner. This advice for making a retirement investment decision includes what to purchase or sell and whether to rollover from an employer-based plan to an IRA.
The proposed DOL Fiduciary rule is set to be finalized early this year. Even if Congress tries to halt the DOL rule-making process, President Obama is expected to veto it and make the biggest change to the Employee Retirement Income Security Act (ERISA) since it was drafted 40 years ago.
Pros and Cons
Financial experts like Kevin Keller, CEO of the Certified Financial Board of Standards, believes it’s time for additional protections because ERISA was enacted even before 401 (k) plans and when IRAs were much smaller than today.
Opponents to the new rules include brokerage and asset management firms, who say the rules are too complex, have difficult disclosure requirements, and will create legal liabilities for advisors. Andy Blocker of the Securities Industry and Financial Markets Association says this will upend the marketplace by “making it unfeasible to serve the market profitably on the lower end.” Blocker says this will hurt smaller, less financially-savvy investors, who will end up with less access to services and higher costs.
Small business representatives like Karren Kerrigan, president and CEO of the Small Business & Entrepreneurship Council, say that the rule will make it harder and more costly for small businesses to offer retirement plans, and hurt their ability to attract and retain the talent they need to grow and prosper.
Legal experts in ERISA law and employee benefits like Marcia Wagner, head of the Wagner Law Group, explain that yes, costs will increase in the short term but the changes are overdue and will result in more market transparency in the long run.
What It Means for Investors and Plan Administrators
Will individual investors with small retirement accounts and 401(k) plan administrators have problems when the rule is implemented? Wagner says it’s a possibility because some firms may exit the marketplace rather than retool operations to comply. But she says the marketplace won’t dissolve and there will still be many advisors available.
Employers should be talking to their 401(k) service providers about the DOL fiduciary rule, as well as seeking legal advice about how the new rule impacts their liability.