On April 8, 2016, the Department of Labor (DOL) issued the long-awaited final rule for stockbrokers. The rule — referred to as the fiduciary rule — has strict guidelines about investment advice with respect to retirement accounts, including 401(k)s and IRAs.
The rule was created to increase consumer protection for account owners but as with most government regulation, there are unintended consequences. Will the fiduciary rule help or hurt your retirement account or influence your decisions about offering retirement plans to your staff?
About the rule
The new rule essentially makes the U.S. Department of Labor the primary financial regulator of retirement savings financial advice. The essence of the rule is that brokers must act as fiduciaries when giving investment advice and selling products for retirement plans. Essentially, they must put the account owner’s interest first. This new fiduciary standard replaces the former standard of suitability. Under the suitability standard, as long as there was a reasonable basis to believe that a recommended investment was suitable, brokers were off the hook.
Now brokers must disclose the risk of a particular investment. They must also disclose if there is any conflict of interest in their advice. And they must have transparency in the fees for REITs, annuities, and other investments for which fees are not readily apparent. The rules apply to both brokers and their firms.
The final rule describes the types of information that constitutes investment education, which is outside the scope of the fiduciary rule. This information includes general financial, investment, and retirement information. Asset allocation models and interactive investment materials can be used to identify investment alternatives for qualified retirement plans that fall under ERISA (a 1974 federal law governing these plans), but not for IRAs where there is no independent plan fiduciary to review and select investment options.
IRA owners must sign a contract acknowledging that they’ve been informed about the investment options, fees, etc. This contract requirement does not apply to ERISA plans.
The rules are phased in, beginning next year. They will be fully phased in by January 2018.
Impact on small business retirement plans
As brokers recommend less risky investments and disclose risks, including fees, the government expects that fees for account owners will decrease. The DOL projected the rule will save $40 billion in fees over 10 years. Sounds great, right? But how will it impact you?
- Because brokers will earn less, they may decline to deal with smaller retirement accounts because it will not be worth their time. They may push smaller commissioned accounts into managed accounts where brokers earn a fixed percentage of the value of the account each year, regardless of trades or the nature of the holdings, rather than commissions on the trades they make or the assets they acquire. It likely will wind up costing small account owners more than they paid previously.
- It may be difficult or impossible for small businesses with few employees to get a plan started. Brokerage firms may not handle accounts with balances below set amounts. More responsibility falls on small business owners to select the type of retirement plan, put together the menu of investments, and monitor investment performance. They could do this themselves, which costs them considerable time and liability if they get it wrong, or hire a third party advisor (TPA), which is a pricey alternative. In sum, the rule may wind up impeding small businesses from offering retirement plans. NFIB says that about 38% of small businesses offer such plans. While the rule was in proposal form, various small business groups, such as NFIB, Small Business & Entrepreneurship Council, and the S. Hispanic Chamber of Commerce, expressed fears that the rule will prevent access to retirement plans.
Bottom line: There is considerable sentiment to end or at least soften the rule. The House Education and the Workforce Committee voted on April 21 to approve the Affordable Retirement Advice Protection Act (H.R. 4293) that would scuttle the rule. But even if Congress votes to end the rule, it likely will face a veto.
Find information about this from the U.S. Chamber of Commerce; you can send a message to your representative about reversing the rule through this link. Assuming the rule doesn’t go away, we have to wait and see how implementation of it impacts small business decisions about retaining existing plans or offering new ones.