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Background
A fiduciary relationship is generally viewed as the highest standard of customer care available under the law. 401(k) plan fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of participants and their beneficiaries. These responsibilities include:
- Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them;
- Carrying out their duties prudently; and
- Paying only reasonable plan expenses.
While financial advisors that offer investment advice to 401(k) plans and IRAs are subject to a fiduciary standard, other financial professionals (banks, broker-dealers, and insurance agents) are generally not. This is a problem because investors may receive conflicted advice when their financial professional is not a fiduciary.
In 2010, the DOL proposed to expand the definition of “fiduciary” under Section 3(21) of ERISA to include broker-dealers who work with 401(k) plans and IRAs. In September 2011, however, the DOL withdrew its fiduciary rule proposal under heavy pressure from lawmakers and industry lobbyists.
Fiduciary Standard vs the Suitability Standard
Instead of a fiduciary standard, brokers are governed by “suitability” standards. This means brokers can sell high-priced products to a client, even when less expensive alternatives exist, as long as they fit the client's investment needs.
The difference between these two standards can have huge implications for small business retirement plan sponsors and participants. While brokers do not have a fiduciary duty to keep investment fees reasonable, sponsors do. This means sponsors must independently evaluate fees when weighing broker investment recommendations or risk personal liability. When investment fees are not kept in check, participants suffer. Excessive fees can dramatically reduce a participant’s account balance at retirement.
Simply put, the fiduciary standard is the gold standard for investment advice. Americans saving for retirement in 401(k) and IRA accounts deserve no less.
Broker Advocacy Groups Rebuke Reform
Industry groups that represent brokers, including SIFMA and ASPPA, oppose a fiduciary standard for brokers. They claim brokers will exit the retirement plan market if they become subject to a fiduciary standard, limiting advice options while increasing the cost of advice. This is a red herring! For over 10 years, we’ve partnered with hundreds of financial advisors to offer retirement plan services nationwide. All of these advisors are subject to a fiduciary standard. When we compete against broker products, our services are rarely more expensive. Don’t take my word for it, see for yourself. You can shop for advisors in your area here.
A Fiduciary Standard is a Common Sense Reform
The benefits of a fiduciary standard to 401(k) savers are clear – conflict-fee advice at reasonable fees – while the reasons cited by opponents of the DOL rule – fewer investment professionals and higher costs – are easily debunked given real world examples.
If brokers do exit the retirement plan market because they don’t want to be a fiduciary, I say good riddance. Any vacuum will be filled in short order by fiduciaries – and very likely at a lower cost! A win-win for small business retirement plan sponsors and participants.
Recently, a coalition of retirement, union and consumer protection groups joined together to support the DOL’s fiduciary rule. The group launched a website, SaveOurRetirement.com, to help educate investors on the issue and mobilize support. It’s worth checking out the site for more information.
I will keep my fingers crossed that President Obama mentions this important cause during tonight’s State of the Union address. You should too.
