On April 6, 2016, the Department of Labor issued a final ruling to expand the Employment Retirement Income Security Act that increases the level of fiduciary standards that advisers and brokers have when working with retirement plans.
The goal of these changes is to add transparency and bring to light the hidden fees often associated with retirement accounts, fees that can accumulate to thousands of dollars over the life of a 401(k).
The fiduciary ruling has been met with harsh criticism by groups such as the Securities and Financial Markets Association and the American Council of Life Insurers, as well as by both Democratic and Republican politicians. They say that it introduces too much government regulation to the industry and forces firms to spend more on compliance and regulatory costs. But most people see this as the right step in ensuring a broker or adviser is working in their clients' best interests.
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What does it mean for consumers? Are they actually more protected or will the oversight mean more government intrusion?
Who Benefits?
These new rulings will affect certain workers investing in retirement accounts differently.
The benefit of the Department of Labor's ruling may sound like something that should have already been in place: Advisers will be required to be transparent about how they charge clients, and they must offer advice that is in the best interests of their clients. In other words, no longer will the method of payment be based on what product is being sold, but rather clients will pay an advisory fee.
So, 55-year-olds creeping closer to retirement will enjoy a greater level of transparency in their investments and have a better understanding of the costs to maintaining their retirement packages. The higher level of oversight on investments will mean their money is being invested in their best interests, as opposed to the benefit going toward the broker receiving the commission. To the extent costs are reduced, there is a greater chance of enhancing portfolio performance.
The 12 months to 24 months following the official start of the ruling is expected to be rocky for advisers with as much as a 40% to 50% turnover in retirement plans. This will be true especially for midrange plans where clients in $1 million to $20 million dollar plans may learn that they are being overcharged and see they could change plans. Potential savings could be anywhere from 30 basis points to 150 basis points, or thousands of dollars.
And this is where the rule can have a big impact on the 55-year-old planning on retiring within a decade. If they have invested consistently since setting off on a career thirty years ago, they will have the means of finding a new retirement plan with greater transparency.
The Drawbacks
A 25- or 30-year-old starting to dip their toe into investments will find they have access to lower cost plans with better options and a greater level of transparency than their parents had. However, at the outset, finding a start-up plan may present a challenge because there will be fewer players in the game—the players using the old commission-based models, those not acting in a fiduciary capacity, will not be able to provide their services. Commission plans will still exist but the brokers will have to prove they are working in the client's best interest. Wire houses and brokerage companies claim it will be harder to offer smaller, introductory plans because of the new rules.
So, how do new investors acquire a better plan? Technology. Better options exist; it is just a matter of researching and discovering these plans. But instead of commission-based investing, investors will have to pay an advisory fee. This could turn off many new investors, especially young investors, who would benefit from opening 401(k) and retirement plans early in life.
Bottom Line
While there are disputes by major companies with a lot to lose, in general, the ruling is a good thing because it's a benefit for the end user.
Changes will not happen overnight. The applicability date is set for April 10, 2017, with a further transition period extending to January 1, 2018, allowing for old revenue sharing models to be altered and for pay structures to change from commission to advisory.
The good news—many of these companies using an advisory model already exist. For example, metro Detroit-based Telemus eliminated its broker-dealer in 2012 and currently acts solely as a registered investment adviser in a fiduciary capacity acting in the client's best interest.
Regardless of the final ruling, you should research to see if your plan is acting in a fiduciary capacity. You should also ask yourself: Do you know what you're paying for your plan?
As a partner at Telemus, Josh Levine works with individual members on comprehensive financial life management issues. He also assists business owners with evaluating their qualified retirement options such as 401(k), profit sharing and cash balance plans.
DISCLOSURE: PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. This commentary is a matter of opinion and is for informational purposes only. It is not intended as investment advice and does not address or account for individual investor circumstances. Investment decisions should always be made based on the client's specific financial needs, goals and objectives, time horizon and risk tolerance. The statements contained herein are based solely upon the opinions of Telemus Capital, LLC. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice. Information was obtained from third party sources, which we believe to be reliable, but not guaranteed.
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