Commentary: After much anticipation, the Department of Labor unveiled a rule on Tuesday that could establish a fiduciary responsibility for brokers working with retirement accounts. The proposal still has to go through the comment period, but if passed, it promises to be a step toward reducing conflicts of interest while urging advisers to work in the best interest of their clients.
On the 401(k) level, this could hit wirehouses and brokers in the wallet to some degree. It continues the tradition set forth by the DOLs 408(b)(2) fee disclosure regulation, which went into effect in 2012, in bringing transparency to fee structures and distinguishing brokers from fiduciaries. Despite setbacks, wirehouses were largely able to adapt to the measures set forth a few years ago, and one would have to be naïve to think they wont find a way to carry on under these new rules as well.
In the rules laid out in the proposal, plan advisers will need to be even more transparent with fees. It states that they must clearly and prominently [disclose] any conflicts of interest, like hidden fees often buried in the fine print or backdoor payments, that might prevent the adviser from providing advice in the clients best interest. That means that nontransparent practices like revenue sharing could be altered if not eliminated completely.
Lets face it the fee issue needed to be addressed. As revealed in Frontlines 2013 investigative report The Retirement Gamble, a 401(k) plan stuffed with excessive fees can redirect thousands of dollars from each participants account to the firms who push those products. Plan sponsors have been duped into those rotten plans for decades because most of them dont know enough about funds and fee structures to distinguish a good plan from a lousy one. Its just not what theyre good at, and this proposed rule, if nothing else, could elevate the quality of the guidance they receive by holding brokers providing bad advice accountable.
Simplicity and transparency need to be at the very core of these retirement plans, and thats the aspect of this proposal that is spot on. It protects workers while also taking some of the heat off of employers, who have been pressured to re-examine their plans due to a recent barrage of high profile 401(k) lawsuits. By shifting some of the focus to the advisers, the DOL is getting closer to the heart of the problem, but it still doesnt go far enough.
Our regulatory bodies should have never allowed two different standards to begin with. The brokers representing wirehouses are salespeople using the adviser label as a Trojan horse. The popular HighTower video comparing the broker and fiduciary dynamic to that of butchers and dieticians nails it. Using that metaphor, plan sponsors need to stop taking advice from the butchers because the health of their employees retirement plans depends on it.
At the end of the day, the DOL is merely putting lipstick on a pig. Theyll need to dig deeper to remedy core problems of our industry. With that said, it will be interesting to see if this actually goes through. My prediction is that the bureaucratic process will either stifle the rule or dilute it to the extent that it brings nominal change. I hope, for the sake of retirement savers across the country, they prove me wrong.
Chris Markowski is the founder of Markowski Investments, a national financial planning firm based in Tampa, FL, and the radio personality behind the weekly nationally syndicated Watchdog on Wall Street program.
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