by Eve Kaplan, Certified Financial Planner (TM) Practitioner
You might be stuck in “The Wild West” without realizing it. I’m referring to your retirement plan – be it an IRA, 401k, 403b or defined benefit plan. That’s because you likely are missing a Fiduciary Standard of Care. That’s a fancy way of saying your interests, as a client, are secondary to the plan provider’s desire to earn fat profits – and it’s perfectly legal to run a retirement plan this way. So while there have been significant improvements in retirement plans in recent years, it’s still early days. On the plus side, 401k and 403b investors now enjoy fee disclosures on quarterly statements, lower costs and the addition of low-cost index funds to defined contribution plans. But the next big step toward boosting retirement plan quality, scheduled to launch on April 10, 2017, may be postponed or worse. This next big step is The Department of Labor (DOL) Conflict of Interest Rule (Fiduciary Rule).
Although regulations and compliance can be unpopular and burdensome to advisors, I feel it’s well worth the effort. The DOL regulations that were supposed to launch on April 10, 2017 mandate higher standards of fiduciary care for retirement plans. If the timing and content now are in doubt what does that mean for your hard-earned retirement dollars?
Where we are now: The April 10, 2017 launch date for a new Department of Labor Fiduciary Rule affecting retirement plans now is on hold (effective Feb 3, 2017) so it can be reviewed. As a result, the regulations can be postponed for several years and/or diluted (“defanged,” as one journalist put it) under the current administration. US insurers, brokers and NON-Fee-ONLY advisors have been fighting the imposition of fiduciary standards for years. That’s no surprise since the retirement plan market is a lucrative $25 trillion dollar market.
What is a Fiduciary standard anyway? What does the new Department of Labor Fiduciary Rule say about it? If implemented, the new Fiduciary Rule is designed to require a Fiduciary standard of care in retirement plans (note: some of this is open to interpretation). “Fiduciary standard” is a dry, abstract term that’s poorly understood by the public. A “Fiduciary standard of care” essentially means that advisors/brokers/insurance companies handling retirement plans are required to put a client needs before their own needs. Here’s the thinking: if client needs are put first (advisors’ needs put second) , fees generally decline on product sales, fewer products are sold and the quality of services to clients improves. Yes, regulations are cumbersome and compliance sucks a lot of time out of advisors, but it is a winning situation for clients. Every dollar saved by a client on unnecessary fees is one more dollar he or she can put toward retirement.
What about the lower “suitability of care” many retirement advisors follow? Currently, brokers, insurers and other retirement plan agents advising folks on retirement plans are given a “free pass” to apply a lower “suitability standard of care.” A “suitability standard of care” is less stringent than “fiduciary standard of care.” What’s in a word? A lot, as it turns out. The majority of retirement advisors can claim that products (A, B, C shares, annuities, etc.) are “suitable” for clients, even if the broker benefits more from the sale than the client (who may in fact be more harmed than helped by some products). A higher Fiduciary Standard of Care could help reduce the many examples of abusive and deceptive sales of retirement plans my clients were put into before we started working together. I’m particularly disgusted by some of the 403b plans offered to teachers and administrators. These folks have been fleeced for decades by insurance companies running unattractive and expensive retirement plans.
So what happens next? We don’t know. Will the Department of Labor (DOL) Fiduciary Rule be implemented or not? It would be a shame to dilute or postpone the DOL Fiduciary Rule because we Americans are facing a serious retirement crisis; any improvements to the quality of retirement plans can help Americans save more fore retirement. Health and medical expenses have been inflating faster than core inflation for decades. Retirement can be a wonderful thing, but not if you run out of money along the way. And retirement can last a very, very long time (30+ years, in some cases). Adult children with aging parents have every reason to worry that their parents will run out of resources and need a financial boost from family.
The Fiduciary standard of care for retirement plans is just the start. Full disclosure: I’m a Fee-ONLY advisor. Like other Fee-ONLY advisors, we don’t sell products or split commissions, our fees are transparent and we practice a Fiduciary standard of care. While it’s not possible to entirely eliminate conflicts of interest in the financial planning and investment management industry, Fee-ONLY advisors (not to be confused with fee-BASED advisors) put the Fiduciary standard of care into practice every day and we work to minimize conflicts of interest. We do this when advising on both retirement AND other investment accounts. However cumbersome new rules are to both implement and enforce, the April 10, 2017 Department of Labor Fiduciary Rule is a decent step toward leveling the playing field currently tipped in favor of large insurers, brokers and advisors managing so-so retirement plans.
“The Wild West” makes for great Clint Eastwood movies, but Americans preparing for retirement shouldn’t have to put up with shady information, murky fees and shoddy standards of care. Attempts to postpone or defang new regulations won’t stop the trend toward improved standards of care in the retirement industry as retirement plan participants see the clear benefits of Fiduciary care over “suitability” standards of care. For some Americans, these positive changes can’t come soon enough.
(C) Copyright 2017 by Eve Kaplan. All Rights Reserved.