Login
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 A fiduciary rule was originally proposed in 2010, but it was withdrawn the following year in response to industry opposition.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.
When I first read the 2015 exceptions, I was disappointed - I wanted a clean fiduciary standard for retirement plan advice with no exceptions. However, after digesting the proposal for a week, my opinion has changed. It may seem counterintuitive, but I believe a watered-down DOL fiduciary rule could be just as effective as a clean fiduciary standard in driving down excessive 401(k) fees.
“Best Interest Contract Exemption”
The most notable exception to a clean fiduciary standard under the 2015 proposal is the "best interest contract exemption." Under this exemption, brokers and insurance agents can provide fiduciary investment advice, while receiving commissions and revenue sharing, provided they commit to putting the clients' best interests first and disclose conflicts that prevent them from doing so.
According to the DOL, “To qualify for the new "best interest contract exemption," the company and individual adviser providing retirement investment advice must enter into a contract with its clients that:
- Commits the firm and adviser to providing advice in the client's best interest. Committing to a best interest standard requires the adviser and the company to act with the care, skill, prudence, and diligence that a prudent person would exercise based on the current circumstances. In addition, both the firm and the adviser must avoid misleading statements about fees and conflicts of interest. These are well-established standards in the law, simplifying compliance.
- Warrants that the firm has adopted policies and procedures designed to mitigate conflicts of interest. Specifically, the firm must warrant that it has identified material conflicts of interest and compensation structures that would encourage individual advisers to make recommendations that are not in clients' best interests and has adopted measures to mitigate any harmful impact on savers from those conflicts of interest. Under the exemption, advisers will be able to continue receiving common types of compensation.
- Clearly and prominently discloses 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 client's best interest. The contract must also direct the customer to a webpage disclosing the compensation arrangements entered into by the adviser and firm and make customers aware of their right to complete information on the fees charged.”
Maybe a watered down rule isn’t so bad
While a clean fiduciary standard offers brokers and insurance agents a straight-forward path for delivering conflict-free investment plan advice, a "best interest contract exemption" makes that path fuzzy and subject to attack in court.
That may not be a bad thing. In my opinion, retirement plan lawsuits, brought by lawyers like Jerrry Schlichter, have been more successful in driving down excessive 401k fees than DOL fee disclosure regulations. Maybe a fuzzy fiduciary standard will fuel more suits that drive the cost of advice lower than a clean fiduciary standard would?
Don’t get me wrong, this is not what I want – I want a clean standard that protects retirement plan fiduciaries and participants. I’m just saying that if the retirement plan industry is successful in watering down a fiduciary standard, I don’t know that investors will necessarily suffer for it.
Careful what you wish for
Retirement plan industry groups like SIFMA, FSI and NAPA have been lobbying against a fiduciary rule for years. The irony is their lobbying efforts may backfire, resulting in greater expenses and risks while lowering revenue for their constituencies.
A DOL fiduciary rule is still a long way away. The April 14, 2015 proposal is currently in a 75-day comment period. After this comment period is over, there will be public hearings, and more probably comments, before a final rule is even possible. The good news is this issue is getting a lot of attention. Hopefully, that attention speeds us towards an effective final rule.
