On April 6, the Department of Labor finalized its long-awaited fiduciary rule for retirement plan investment advice. Under this rule, all financial advisors to retirement plans are required to act according to a “fiduciary” standard – in other words, they must give impartial investment advice that’s in their clients' best interest. Prior to this rule, only some advisors were subject to a fiduciary standard. Brokers and insurance agents were subject to a lesser “suitability” standard. The problem with the suitability standard is that there is practically no investment that is “unsuitable.” Hidden fees, outrageous redemption charges, lousy performance and house funds with high commission payouts – everything is suitable and anything goes. The old standard allows for certain advisors to provide financial “products” that give the appearance of unbiased advice, but in reality represent blatant conflicts of interest.
When a small business sponsors a 401k plan, several investment-related decisions must be made by fiduciaries. Dramatically different fees and expenses can result from this decision-making, so fiduciaries should know their options in order to make “prudent” decisions on behalf of plan participants – an obligation under ERISA. Otherwise, personal liability can result.
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Selecting competent service providers is the most important - and most confusing - fiduciary duty of a 401k sponsor. Why? Services offered by 401k providers can vary dramatically in breadth, depth and price. This variability makes it difficult for 401k sponsors to match appropriate services to plan needs. Many small business 401k plans pay for superfluous services participants do not use. These excess services are often expensive, dragging down participant investment returns and creating potential personal fiduciary liability for the 401k sponsor. If you sponsor a 401k plan, I recommend following a two-step process to ensure your plan does not pay fees for services your participants will not use: 1) understand the services that compose a 401k plan and 2) determine which of these services require professional assistance to deliver. Once this process is complete, you’ll be ready to shop for professional service providers.
Saving for retirement is one of the most important things we must do during our working years. After all, nobody can work forever and living expenses don’t stop after you stop earning a paycheck. And yet too many of us aren’t saving enough for retirement. Why is that? For workers that can afford to save, I think the number one reason is the inability to cut through the complexities of saving and investing. Today, workers must answer complicated questions to successfully participate in a 401k plan. I believe these questions scare a lot of workers away from giving their savings enough thoughtful consideration.
Critics of the DOL’s proposed fiduciary rule, also known as the "conflict of interest rule for investment advice," argue that the rule will make investment advice too costly for many 401k plans. If the critics are right, this issue would be a compelling reason to scuttle the rule – studies have shown that professional advice can help 401k participants increase investment returns. An Aon Hewitt study found that median investment returns for 401k participants using target-date funds, managed accounts and other investment advice were 3.32% greater than returns earned by participants that picked investments themselves.
On April 14, 2015, the DOL proposed its long-awaited fiduciary rule designed to protect retirement plan savers from conflicted investment advice. A fiduciary rule was originally proposed in 2010, but it was withdrawn the following year in response to industry opposition. The stakes are high. According to a White House Council of Economic Advisers analysis, conflicts of interest cost retirement plan investors $17 billion per year. Like the 2010 proposal, the 2015 proposal generally requires financial advisors serving retirement plans and IRAs to operate in a fiduciary capacity, putting the interests of their clients before their own. However, the 2015 proposal adds several new carve-outs and exemptions not found in the 2010 proposal.