New Rules on Fiduciary Duty for Retirement Account Advice

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The Department of Labor has released their final rule on reducing conflicts of interest on retirement savings advice. As expected, the new rule now requires any person who provides investment advice on retirement accounts like 401(k) or IRAs to act as fiduciaries and put their client’s best interest first. The goals are to save investor money otherwise directed to hidden fees and commissions, while helping even the playing field for the financial advisors have been acting as fiduciaries all along.

Commentary. Lots of people have most of their retirement savings in 401k plans, which are often eventually rolled over into IRAs. There are entire firms of salespeople who try to capture this money and skim off huge commissions, and now they will have to act as fiduciaries.

While it can be touted as an overall “win” for consumers, there are still plenty of grey areas. The final rule requires firms to be compliant on several broader provisions by April 2017 and fully compliant by Jan. 1, 2018. Existing investments are grandfathered in. Small 401(k) plans are exempt from some of the rules. Firms can still technically sell you things like high fee variable and indexed annuities in IRAs and brokers can continue to recommend proprietary products, there just has to be a believable shred of reason behind it.

I’m going to be honest, I read about 20 articles on this subject and my head hurt with all the little details. This rule could have really blown up large parts of the industry, but you can tell they really tried not to disrupt anything significant. Try reading some for yourself:

Department of Labor Official Page
Department of Labor Press Release Fact Sheet
White House Fact Sheet [PDF]
NY Times 1, NY Times 2
WSJ 1, WSJ 2

In other words, the nastiest stuff with the highest hidden fees and commissions will probably go away. So it’s a win around the edges. For the savvy DIY investor or the person with their money with a trustworthy registered investment advisor (RIA) that was already a fiduciary, the effect will likely be small if anything.

Hopefully, if you decide to have someone help you manage your investments, they are already a fiduciary, have been for a while, and don’t need someone to tell them to act in your best interest.

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Comments

  1. My favorite part of this process has been when one investment firm told Congress “This rule will put us out of business!!” and then, in it’s statements to investors that are required by law to be truthful, said “Our profits won’t be impacted by this rule, it’s no big deal”.

    http://www.forbes.com/sites/maggiemcgrath/2016/02/11/elizabeth-warren-slams-financial-firms-two-faced-responses-to-dol-fiduciary-rule/#474591e9443e

  2. I’ve been seeing a lot about this and honestly I have no real idea what it means. If someone asked me to explain how this would affect the average person, I would not have an answer. But it seems like good news?

  3. Hate to be so negative but if you’re a sucker you’re still going to end up with investments that are expensive or not in alignment with your goals/objectives. The only hope for most people is that they somehow get lucky and end up in a target date fund from vanguard or fidelity. I am always shocked with my group of friends who are highly educated and make good money but they absolutely do not understand their investments… Some are paying 2% of assets yearly for risky investments / fancy advisors.

    In some sense this bad news because it becomes another selling point that the retirement advisors have to be in your best interest by law… So of course they are.

  4. Added some additional commentary on original post.

  5. This is just more nanny state tactic rules put in place by a government that thinks people are too stupid to think for themselves. Wall Street Journal article said that it will push more people into government bond funds. It also said that it would choke out middle class investors. I will be the first to say that there are some bad people out there that will take advantage of people but more government rules are not the answer. The other commenter mentioned his friends who were intelligent but do not having investing knowledge. They are lazy and my opinion is that most will not give up immediate gratification for long term gain. I saw in one financial magazine where people will spend 6 hours researching the purchase of a TV but won’t spend 2 hours researching a mutual fund where they put there money. When most people get older and look back they will regret this. My mom and dad were always savers but because my dad came up during the depression he would not put money In the stock market only CD’s. They have done OK because they were diligent savers but if they had just put 20% in the market they would probably be multi millionaires. just remember personal responsibility is always better than government care and a government that is big enough to give you everything you want is also big enough to take everything you have.

  6. PS Thank you Jonathan. I have learned a great amount and found great deals just reading your blog.

  7. Rodger Alan Friedman says:

    Much had been written about the new fiduciary rules that continue to be debated in the halls of Congress. The rules are aimed at increasing protection to investors saving for retirement. Personally, I think this an important and noble cause. The devil of course, is in the details.

    This past weekend I read that Democrat Patty Murray of Washington said: “Some financial advisers have lined their own pockets by steering clients toward complicated investments. Some have recommended that retirees make transactions that come with hidden fees. And some get commission when they sell a financial product, even if it doesn’t make sense for a client,” she said

    While I feel comfortable questioning and debating Democrat and Republican alike, I see these types of political statements as entirely useless, inflammatory and tired.

    Ms. Murray, as a professional financial advisor, I agree with you “Some financial advisers have lined their own pockets by steering clients toward complicated investments”. Likewise, some politicians have lined their own pockets by not adhering to strict moral principals they should have learned in Sunday school. You see, this “throw away” line can be used to demean any vocation, even yours. It does not add to a thoughtful discussion, it is filler.

    Ms. Murray further stated, “Some have recommended that retirees make transactions that come with hidden fees”. I would agree that many in the financial services have acted in this manner. That is why there are regulations in place that make this type of behavior unacceptable and subject to punishment. And finally, Ms. Murray offers that, “And some get commissions when they sell a financial product, even if it doesn’t make sense for a client,”.

    In every profession and industry Senator, there are those that seek to take advantage of others. Be it the legal profession, financial services, building and construction or government contracting. Certainly, politicians have not been immune to this character weakness. One only has to read a local newspaper to find articles of elected politician’s using their office for personal gain. There are thousands of regulations that specify how we are to act when engaging our fellow Americans in commerce or governing and there will always be those that flout the laws for their own personal gain.

    What is not useful to his discussion is yet another politician and their staff insuring that a sound bite crafted by their staff is included in media coverage of the discussion.

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