This week, the DOL delayed the effective date of its Fiduciary Rule – which would define all retirement plan financial advisors as ERISA fiduciaries, effectively banning conflicted 401(k) investment advice that puts advisor profit ahead of client interests – by 60 days from April 10, 2017 to June 9, 2017. The delay was triggered by a memorandum from President Trump that directed the agency to complete a new analysis of the rule’s likely economic impact.
As a critic of the Fiduciary Rule, it’s a good bet that President Trump ordered the DOL analysis to build a case for overturning it. If that happens, it would be a huge (yuge?) victory win for brokers and insurance agents – who are currently non-fiduciaries. According to a study from the White House Council of Economic Advisers (CEA), these advisors rake in more than $17 billion in excess fees annually due to conflicted advice.
If you are a supporter of the Fiduciary Rule like me, it can be easy to be upset by the Trump administration delay. However, I’m not worried about it. Even if this ban on conflicted retirement plan advice is squashed, I am confident the die is cast. Following several high-profile excessive fee lawsuits, more 401(k) plan sponsors than ever are hiring fiduciary-grade financial advisors to lower their liability. The kicker? Their impartial advice is often cheaper than potentially-conflicted, non-fiduciary advice. And I have the numbers to prove it!
Employee Fiduciary partners with financial advisors nationwide. Every one of these advisors is licensed under the Investment Advisers Act of 1940, making them all ERISA fiduciaries today.
Recently, we completed a study where financial advisor fees for 525 plans that pay advisor fees from plan assets were evaluated. The following table summarizes the findings of our study:
| Plan Asset Range | $0-$250k (151 plans) | $250k-$1M (212 plans) | $1M-$5M (162 plans) |
| Asset Average | $99,481.58 | $590,880.80 | $1,970,036.16 |
| Participant Average | 21 | 21 | 51 |
| Range | 0.25% - 18.86% | 0.11% - 1.90% | 0.03% - 1.20% |
| Average | 1.15% | 0.70% | 0.52% |
| Median | 0.80% | 0.75% | 0.50% |
A plan-level breakdown of this summary can be found here.
Employee Fiduciary provides custody, recordkeeping, and administration (plan document, testing, Form 5500) to 401(k) plans. Financial advisors ally with service providers like Employee Fiduciary to deliver “bundled” (complete) 401(k) solutions to plan sponsors.
When evaluating financial advisor fees, sponsors should do so within the context of the total fees charged under the bundled arrangement. By adding financial advisor fees from the prior table to Employee Fiduciary fees, average total plan fees can be determined.
| Plan Asset Range | $0-$250k (151 plans) | $250k-$1M (212 plans) | $1M-$5M (162 plans) |
| Employee Fiduciary Fees* | $1,579.59 | $1,972.70 | $3,706.03 |
| Advisor Fees* | $1,148.72 | $4,160.77 | $10,182.04 |
| Total Fees* | $2,728.30 | $6,133.48 | $13,888.07 |
| Percentage of Assets* | 2.74% | 1.04% | 0.70% |
*Based on average plan assets and participant count.
These figures do not include investment expense ratios. That said, most of the financial advisors that partner with Employee Fiduciary use low cost investments like index funds and ETFs in their fund menus. The average expense ratio of a menu using these funds can be as low as 0.15% of plan assets.
BrightScope is a leading provider of retirement plan ratings and investment analytics to participants, plan sponsors, asset managers, and advisors. In 2015 they released the following chart that summarizes 401(k) fee information from their database:
While plans under $1M are not represented by this chart, you can see the glide path for 401(k) fees and that plans that use a fiduciary-grade financial advisor do not pay more. In fact, most often, they pay less.
The beauty of the DOL’s Fiduciary Rule is it puts 401(k) plan sponsors and financial advisors in the same boat – they’re both ERISA fiduciaries that must put the interests of 401(k) participants first. Today, only financial advisors licensed under the Investment Advisers Act of 1940 are obligated to meet this standard - brokers and insurance agents are not.
Hiring a financial advisor that’s not obligated to give fiduciary-grade investment advice can be a costly mistake for 401(k) plan sponsors. When they follow conflicted investment advice, and participants pay too much for plan investments, fiduciary liability can result. More plan sponsors than ever are not taking this risk - they’re hiring fiduciary-grade advisors instead. I don’t see this tide turning even if the Fiduciary rule is overturned. The best news about this trend? Fiduciary-grade advice often costs less.