The Department of Labor will repropose its rule amending the definition of fiduciary.
Retirement plan participants would like to believe that their financial advisor is working in their best interest, but a fiduciary definition, required under the provisions of the Dodd-Frank Act, would make it official. That will have to wait until early 2012. After months of debate over its original proposal, the Department of Labor’s Employee Benefits Security Administration announced it will repropose its rule amending its fiduciary definition under the Employee Retirement Income Security Act (ERISA).
At issue is the Labor Department’s proposal to expand the scope of fiduciary responsibility to protect individuals saving for retirement plans from conflicts of interest. Under the rule, investment professionals who advise employers and workers in 401(k) retirement plans or IRAs to act in their clients’ best interests. The department first proposed its rule change in October 2010 in order to “update” the fiduciary definition to more broadly define the term as a person who provides investment advice to plans for a fee or other compensation.
This sounds good on paper, but lawmakers, organizations such as the Insured Retirement Institute and the National Association of Insurance and Financial Advisors as well as private companies that manage retirement plans or investments in IRAs urged the Labor department to delay and re-propose its rule. They contend, according to The Hill blog, that the change to the 1975 regulation could lead to advisers who oversee investment retirement accounts falling under that status, potentially changing how they are compensated.
The IRI praised the DOL’s decision, claiming in a statement that “as the rule was written, middle-income individuals likely would have been denied access to services for saving through IRAs because minimum account balances and annual service fees will make those services completely impractical and unaffordable to a substantial portion of Americans With this move, the Department of Labor now has the opportunity to work with all stakeholders to write a rule that will protect all Americans without placing unnecessary burdens on the professionals who are working to help Americans save for a secure retirement.”
“We have said all along that we will take the time to get this right to ensure that we provide the strongest possible protections to business owners and retirement savers in plans and IRAS, EBSA Assistant Secretary Phyllis C. Borzi said in a statement. “Investment advisers shouldn’t be able to steer retirees, workers, small businesses and others into investments that benefit the advisors at the expense of their clients. The consumer’s retirement security should come first. The agency will carefully craft new or amended exemptions that can best preserve beneficial fee practices, while at the same time protecting plan participants and individual retirement account owners from abusive practices and conflicted advice.”
More than half of investors surveyed last year by Millionaire Corner believe this type of fiduciary standard is necessary, but a large percentage don’t believe it will make much of a difference. Nearly three-quarters of households with $100,000 to $1 million of net worth use a financial adviser to some extent. A Full Service Broker is most commonly consulted, followed by an Independent Financial Planner. Currently, Full Service Brokers, as well as Investment Managers, and Independent Investment Advisers (RIAs) are not held to a fiduciary standard when providing investment advice to individuals. Similarly, Certified Financial Planners are not fiduciaries but do have a Board of Standards and a rigorous certification process.
Most individuals believe their financial advisers currently acts in their best interests and in fact, trust is one of the key buying criteria and loyalty factors in the client-adviser relationship. In fact, 97% of the investors identified above rank Trust as the primary reason they use their existing financial adviser.
Donald Liebenson writes news and features for Millionaire Corner. He has been published in the Chicago Tribune, The Chicago Sun-Times, The Los Angeles Times, Fiscal Times, Entertainment Weekly, Huffington Post, and other outlets. He has also served as a marketing writer for Chicago-based Questar Entertainment and distributor Baker & Taylor.
A graduate of the University of Southern California, he is married with a college-age son. He also writes extensively about entertainment.