The Department of Labor "talks the talk" when you walk into its Washington office building and are confronted with a 50-foot-long bronze statue of workers tugging on wrenches and shoveling coal. Beneath the sculpture is the motto, "Protecting the Rights of American Workers." Now, finally, after almost 20 years, they are on the verge of "walking the walk" with regard in further protecting workers' retirement assets from financial industry predation.
I was invited there in 1998 because of my cover article in Money magazine titled "Beware, Retirement Plan Rip-off." The article was an account of the hidden fees in 401(k) plans that got the attention of the Labor Department. About 15 years later, I testified before Rep. George Miller's Committee on Education and Labor on the same subject, which lead to laws that mandated fee disclosure in 401(k) plans.
Now the big guns are aimed at individual retirement accounts (mostly rollovers) where over $10 trillion has now accumulated -- the purest expression of hard work and discipline on the part of employees during their careers. Recognizing the importance of these accounts, the Labor Department has proposed new regulations requiring commission-based financial advisers to adhere to a "fiduciary" standard rather than just a "suitability" standard.
A fiduciary is charged with the legal responsibility to make all recommendations in the sole interest of the client. A suitability standard, by comparison, allows an adviser to collect whatever they want from the third party providing the investment -- typically a mutual fund or insurance company.
Currently, if they make the case that a mutual fund investment is "suitable," when, in fact, it might offer several different compensation schedules for the broker, they don't have to disclose that the share classes all charged (and paid in commissions) varying amounts for the same fund. In another example, the adviser might have failed to point out that a complicated and lucrative (for them) investment product that arguably had been "suitable" had never delivered any risk-adjusted returns that were an improvement over a simple inexpensive index fund. As a fiduciary, that adviser would have committed a prohibited transaction.
With respect to IRAs, the proposed new law would end all of this. An adviser recommending an investment product that paid them would be engaged in a "prohibited transaction" because a fiduciary cannot benefit materially from recommendations they make to a client. They can negotiate a fee to be charged for their advice, but the investment products they handle have to be "revenue neutral" -- meaning that it can't make any difference to the adviser if they recommend one combination of investments versus any other. Being "suitable" with its ill-defined gray area will no longer be enough.
An article in the latest Morningstar magazine speculates that the new fiduciary rule will be a "game changer" and that it will be finalized this spring. It will cost commission-based financial service advisers an estimated $2.4 billion in revenue. The solution, obviously, is to move to fee-based advising, which many brokers have already done. To give up the brokerage license and become registered investment adviser is a tack that many have taken.
This is far better for the consumer, because the conflict of interest has been removed, and the cost is clearly disclosed. But it gets better. A fee paid in commissions was coming out of what would have been earnings in the plan. Now, it can be paid as a cost separate from the growing plan assets.
The most expensive money anyone could ever use to pay a bill is money in a retirement plan that could otherwise be compounding tax free. In spite of this, many fee-based advisers prefer to have fees deduced automatically from accounts as a billing convenience and to avoid a steady reminder of what advisers are charging. If this is the case, just say, "NO!!." Ask your adviser to run the numbers showing how much more your account would be worth in 10 or 20 years if you paid the fee separately.
The wheels of progress in Washington grind very slowly, as my timeline of involvement suggests, but sooner or later the results can be productive. I take joy in the endeavor and let it go at that.