The New 401(k) Advice Rule and the Road to a New Fiduciary Standard

A couple of years before and a couple of years after I left that third party administration (TPA) firm  the Director of ERISA Legal Services, I predicted their demise. Whether it was co-workers or competitors or financial advisors I had worked with in the past, people thought I was crazy to make such a prediction. When that TPA imploded as a result of issues over how they used revenue sharing and how the auditing firm they referred a lot of work to them wasn’t independent, I was vindicated. The same happened when that TPA was forced to merge into a sister TPA, I predicted that lots of jobs in our old New York office would be lost. Again, I was ridiculed. After more than a third of the office was laid off in a bloodbath, I was vindicated again for my bold claims. In both situations, I didn’t have a crystal ball. I simply took simple business concepts and let that be the basis of my predictions.  For my old TPA, we had management operating the business as if it was still 1993 and I knew fee disclosure was inevitable. As for gutting the TPA’s staff when it merged into its Massachusetts based, sister TPA, anyone with a basic knowledge understands when there is a merger, there is always a cost savings by reducing employee headcount when there is a duplication of services. Why still have a conversion and processing staff in New York when you already have one in Massachusetts? So no crystal ball, just common sense. My bold predictions don’t extend past the retirement plan business as I got President McCain and death of e-book readers wrong.

So for the past year or so, I have predicted that the retirement plan business will once  again be changed because there will be a new fiduciary standard that will create a leveled playing field where anyone who call themselves a retirement plan financial advisor will have to be a fiduciary. So brokers who push their own product and own 401(k) platforms would have to change the way they do business to meet this new standard.

Of course, when the Department of Labor (DOL) withdrew their proposed fiduciary definition change after much pressure by Congress and broker-dealers, some broker had a sigh of relief. I still maintain that the fiduciary standard is inevitable. The rule withdrawal was just a way for the DOL to tinker with the definition and eventually add IRA accounts as also requiring a fiduciary standard for financial advisors working in that space.

The new DOL rule on 401(k) advice, which will be implemented in about 60 days (I bet it gets pushed back, the DOL loves) in my view is just another step for the DOL to push the new fiduciary standard forward.  The DOL’s new advice rule allows the plan provider to offer advice themselves, as long as they meet one of two requirements that are designed to minimize their conflicts of interest. Either the fees they receive must not vary based upon their recommendations; or the advice must be generated by a computer model that’s been verified as unbiased.

I see this change as a boon to 401(k) participants and bigger boon to people who will now be the auditors verifying that the advice is unbiased. I see this rule change as just another exit on the highway to a new fiduciary standard. Why? It’s all about the lack of bias, whether it’s the use of a computer model or the use of a flat fee type of billing arrangement. This lack of bias is in conflict with the way brokers currently operate in the retirement plan space (under the current fiduciary rules, where they are not plan fiduciaries) who are in the business of selling securities and perhaps getting better commissions for certain investment products or 401(k) platforms they have to push. The fiduciary standard is about putting the retirement plan ahead of any monetary gain; it’s about not making transactions or investments that benefit the financial advisor of the plan at the expense of the plan’s assets  

Change in the fiduciary rule is inevitable. The trip to that new rule on that highway may be delayed, but it’s inevitable. The new fiduciary standard is inevitable, just like fee disclosure and 401(k) advice.  While brokers may have been given a temporary reprieve, I believe that the DOL will make another attempt at changing the definition.

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