The federal government will soon re-release its proposed rules defining who is a fiduciary when it comes to employee retirement plans.
The U.S. Department of Labor first released a proposal in October 2010, hoping to make anyone who gives retirement advice a fiduciary. The purpose was to close a loophole in the rules that allowed investment brokers to give advice to people about what they should include in their individual retirement accounts, while at the same time accepting commissions on the investments they recommend.
Supporters of a new fiduciary rule say that all of the fees and commissions are eroding peoples retirement savings and that if people who accept commissions are giving retirement advice, they should be held to the same fiduciary standard as registered investment advisers, who give advice that is in the best interest of their clients but for a fee.
Industry opponents claim that limiting a brokers ability to give advice will limit the information that is available to people who cant afford to pay for the services of an RIA. Studies have shown that individuals who receive advice from brokers and investment advisers do a much better job of managing their retirement savings.
The big challenge is, are they going to happen? said Liz Davidson, CEO of Financial Finesse in Los Angeles. There have been a lot of efforts and a lot of resistance from the financial services industry. Thats the big question. If you divide it into advocacy of this and awareness around fees, that alone is a good thing for plan sponsors and employers. The more this is brought up and discussed as an issue, the more savvy they become about fiduciary responsibility vs. a suitability standard.
It is important to have discussions about the fees brokers are charging because fees are the one thing you can control in investments, Davidson said. You cant control return but you can control fees by choosing low fee investments. Over time, lower fee investments overwhelmingly outperform higher fee investments.
She added that it is very important for employers to be more aware of the conflicts of interest that are out there and the importance of protecting their employees.
When we started our business in 1999, it was very common for brokers to go into workplaces, do a workshop and use that as an opportunity to promote their products and services. They were commission-based brokers, she said.
That model, at least in the large and medium company market, is going away because fee disclosure rules that were passed in the past couple of years have raised awareness, she added.
We hope this actually does happen. We think it will. As awareness is raised, people will become greater advocates for this and then, obviously, ultimately, you reach critical mass and Congress has much more pressure, Davidson said.
Numerous lawsuits have been filed regarding high fees and an employers fiduciary responsibilities. Many recent cases have been settled in favor of the participants in a company-sponsored retirement plan.
Theres this tighter standard in how it is interpreted, which is good, she said. It means nothing until the rubber meets the road. When you look at the evolution over the last couple of years in retirement plan design, the interpretation of what it means to be a good fiduciary, in financial wellness and in employers really understanding conflict of interest and fee disclosures, it has shifted a whole lot.
The challenge now is that none of this matters if people dont save enough. It is up to employees to take control of their finances with the good structures theyve been given by employers. None of that matters if this doesnt happen.
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