Retirement account fiduciary rule: Back to the drawing board
02-25-2017- In 2016 the Department of Labor under the Obama Administration issued a new rule requiring brokers to act in a fiduciary capacity when providing advice on retirement accounts - in other words, to put their client's interest above their own. The goal: To eliminate backdoor payments and hidden fees that the White House estimated drains the public's retirement savings by $17 billlion annually. The rule applies only to retirement accounts such as 401k's and IRA's. (Note that the rule does not impact Registered Investment Advisors; they are already legally bound to prioritize their clients' best interest.) Then Secretary of Labor Thomas Perez hailed it as a victory for the middle class. However, many in the financial industry were critical, arguing the new regulation is overly burdensome for financial advisors, particularly independent advisors and small companies, and predicting it would ultimately cost consumers more and narrow their investment choices.
The rule was expected to become effective April 1. However, it is now delayed. In fact, its entire future is now in limbo. An executive order issued by the Trump Administration in February directed the Department of Labor to return to the drawing board and re-analyze the fiduciary rule. (You can read the executive order here.) The executive order was met with cheers and jeers from the predictable camps. Speaker of the House Paul Ryan said, "President Trump's action to delay the Obama administration's fiduciary rule for further study is a wise one... It is essentially Obamacare for financial planning..." The Consumer Federation of America, on the other hand, said, "The only reason to repeal the rule at this point is to give a multi-billion dollar handout to the industry paid for by working Americans and retirees."
Some financial companies have been gearing up since the new rule was announced, and are already in compliance. Merrill Lynch, for example, has announced it will no longer offer commission-based retirement accounts. It is possible that these companies will adhere to the fiduciary rule, no matter the outcome of the Department of Labor review.
For now, it's back to the status quo. That means that any retirement account investment recommended to you must be "suitable." This is a lower standard than the fiduciary standard. For example, your broker can steer you into a suitable but more risky retirement investment instead of a more prudent one - if the former provides the broker with higher commissions. Thus, as in all money matters, you must remain vigilant. Ask your advisor to explain his/her recommendations and always ask questions until you are satisfied that you are investing your money prudently. Riskier investments or higher-fee investments are not necessarily bad ones, but your broker should provide you with a rationale for such a recommendation.