Is this a sad day for your 401k?
There’s a battle raging for the heart of the retirement plan industry.
Yesterday, the Department of Labor (DOL) put Fiduciary Rule Enforcement on Hold … but they can’t put it back in the bag.
In the beginning, insurance agents, many of them not even securities registered, were able to “broker” retirement plan business, helping companies set up their 401(k) plan or 403(b) plan within a group annuity for commission.
Eventually, ERISA (the Employee Retirement Income Security Act of 1974) became an increasingly specialized area of law and regulatory enforcement was heightened from the DOL, the IRS, the SEC (Securities and Exchange Commission) and FINRA (Financial Industry Regulatory Authority) (formerly the NASD or the National Association of Securities Dealers).
As a result of increased oversite and greater scrutiny, shaped by legislation and litigation, the retirement plan industry has become increasingly specialized. Plan Fiduciaries (employers responsible for sponsoring the retirement plans for their employees) are increasingly hiring Plan Fiduciary Advisors, highly trained specialists who serve as professional retirement plan advisors, drawing all or nearly all of their income from serving qualified retirement plans (401k, 403b, governmental 457 plans, and/or pension plans).
But still we have the “1 Truck Chuck” or the “2 Plan Tony” who specializes in selling insurance and financial planning, only dabbling in the retirement plan industry. Conflicts of Interest and Prohibitive Transactions still exist unabated as employers (the plan sponsors) pay too much and take on way too much liability, as brokers continue to find ways to increase their commissions and/or create new revenue streams, and as the plans languish in noncompliance in the face of undermanned enforcement teams.
And ultimately the employees (the plan participants) suffer the most.
The battle rages on for the heart of the retirement plan industry, largely misunderstood or ignored by consumers (the employers and employees, the plan sponsors and the plan participants). Some call for tighter regulations, others for better enforcement of existing guidelines, but ultimately what we need is better education for the public. If the average American understood what was at stake (the cost of not producing healthy retirement outcomes for employees, the cost of plans grossly out of compliance, and the cost of deceptive sales practices among some within the financial industry) there would be a rush towards even greater specialization, just as those fighting heart disease would never seek the care of a general practitioner; a general medical degree no more qualifies someone to do cardiac surgery than an insurance license qualifies someone to handle the enormous fiduciary responsibility of an employer-sponsored retirement plan.
On one side of the battle for our heart is the specialist, the professional retirement plan advisor, the Plan Fiduciary Advisor, and in some cases the Certified Plan Fiduciary Advisor (CPFA®). Organizations like NAPA (National Association of Plan Advisors) and the Retirement Advisor Council and The Committee for the Fiduciary Standard work to raise the level of professionalism within the industry, welcoming the fiduciary burden commensurate with the expertise that the job requires. The “specialists” are more likely to work on a fee-basis than a commission basis, and increasingly likely to work for a flat fee. The “specialists” are more likely to produce better retirement outcomes (higher participation and higher savings rates) and to manage plans that are typically in greater compliance. Generally speaking, the larger and more sophisticated the plan, the more likely that that plan is served by “specialists.” The irony is that greater specialization does not require greater cost. Generally speaking, “specialists” charge less, particularly if they are serving the plan for a flat fee.
Generally speaking.
There are always exceptions, of course.
On the other side of the battle for our heart is the rep, the financial rep, the insurance broker, the “general practitioner” that makes up the majority of the financial industry. The Broker-Dealer community and the insurance industry stands ready to fight to protect those revenue streams of commission. To be fair, many “reps” do a great job of serving their individual clients and some have a great deal of specialization. A few are even Certified Financial Planners™ (the CFP® equivalent for individuals that the CPFA® is for employer-sponsored retirement plans). The “reps” are more likely to work on commission, more likely to work with underperforming plans, more likely to work with smaller retirement plans, and more likely to overcharge. The plan-level fee charged by the “rep” is likely to provide only one source of income, and possibly not even the largest source of income, as the “rep” layers ancillary services like a Managed Accounts program and capturing rollovers with the sale of additional “financial products” (like insurance).
There are, of course, exceptions on this side of the battle as well.
The point is that on one side of the battle they are trying to raise the fiduciary standard and on the other side they are trying to lower the fiduciary standard (or do away with it altogether).
And in the middle is the average American worker.
The DOL tried to put some teeth into their enforcement with the “Fiduciary Rule,” an accomplishment of the previous administration in Washington. But the insurance industry is powerful. First, they fought to add a Best Interest Contract (BIC) Exemption (though it is rarely in the best interest of plan participants to roll their money out of an employer-sponsored retirement plan into a more expensive individual contract or annuity) and then they continued fighting the fiduciary standards in court. With the latest decision from the US Court of Appeals for the 5th Circuit against the Fiduciary Rule, the DOL decided yesterday to “put the Fiduciary Rule on hold” … but they can’t put it back in the bag.
It appears to be a small set-back for “specialists” … but there is more to come on this issue.
On the one hand, the SEC appears ready to take up the battle, bringing their own guidance about a new definition of the Fiduciary Standard. On the other hand, the DOL’s rule could be resurrected under a new administration in Washington when the political tide turns.
But it would be nice if education could keep pace with the efforts of the SEC and DOL, if the public was simply more aware of the issues and insisted on hiring expertise.
And thankfully, that is the direction we are moving, albeit ever so slowly.
Ultimately, it’s a matter of not being able to put the cat back in the bag. Until the Fiduciary Rule was issued, most consumers had no idea that their financial advisor did not have to act in their best interest. An advisor could sell a higher commission product or lock consumers in an annuity if it was deemed generally suitable. The suitability standard is much lower than the fiduciary standard to act in the client’s best interest.
The fiduciary standard may have hit a speed bump, but it won’t stop the traffic completely. Asking the public to “unhear” that their advisors may not be acting in their best interest may be as ineffective as asking a jury to disregard evidence produced in a courtroom.
Some things can’t be unheard.
Why would a plan trustee choose to work with a financial rep who doesn’t want to be a plan fiduciary? Why would a plan sponsor choose to pay commission when they could be paying a flat fee? Why would any employer pay more for less?
Why are tighter regulations even required to protect us from ourselves?
And why are less than 10% of all retirement plans served by a professional that holds themselves out as a “specialist” in that industry?
If we understood better the condition of the heart of our industry, we would demand a cardiac specialist rather than a general practitioner.
