Last April, the Department of Labor (DOL) re-proposed a regulation for comment that redefines the role of a fiduciary as it pertains to retirement investments. A fiduciary is responsible for managing the assets of another person, or of a group of people. A fiduciary’s responsibilities are both ethical and legal. When a party knowingly accepts a fiduciary duty on behalf of another party, they are required to act in the best interest of the party whose assets they are managing. The fiduciary is expected to manage the assets for the benefit of the other person rather than for his or her own profit, and cannot benefit personally from their management of assets.
The DOL proposal will apply a fiduciary standard to all financial advisors providing investment advice for a fee to a retirement account plan or participant by expanding the universe of 401(k) plan advisors and advisors of IRA investors. The fiduciary standard will require these advisors to give advice which is in the “best interest” of their clients rather than advice that is “suitable”. This means that today’s common compensation arrangements for retirement advisors (e.g. commission-based) will be prohibited under the new fiduciary standard.
The rule also grants two exceptions for fiduciary transactions that otherwise would be prohibited. The first is the Best Interest Contract exemption which would allow financial institutions to receive commissions in exchange for disclosing to investors the total cost of each new investment over one, five and ten year holding periods at time of sale. In addition, financial institutions must provide investors a summary of total expenses incurred as a result of the advisor’s investment recommendations, broken down to the amounts paid to the advisor and the advisor’s firm.
The second exemption, the Principal Transaction Exemptions permits financial institutions to continue to receive amounts over the prevailing market price when providing retirement investors debt instruments from their own inventory, including corporate debt, agency debt and Treasury securities.
The rule has sparked healthy conversation around conflicts of interest provides transparency and insight into the retirement advice marketplace. The rule, like so much regulation that precedes it, will result in better information a consumer can use to make a more informed decision. This information will come at a greater cost born by the financial institutions, that have to accumulate, verify and monitor the information, ensure it’s compliant with the rule and produce and distribute it. Ultimately, consumers will pay this cost until technology, innovation or new market entrants disrupt the market with new products or business models.
All of this effort will be fruitless unless consumers take accountability for their future retirement financial condition by taking the time to read and understand the information, ask trust advisors to assist them in their understanding and act in their best interests.