New Fiduciary Rule
A big change for investors occurred on 4/6/16. The DOL issued its final version of its long awaited “Fiduciary Rule”. To give you a little history-in the past advisors would just have to follow what was referred to as a “suitability rule”. Simply put the advisor could select an investment fund for a 401k plan, choose the expense ratio for that particular fund (most funds have 6-7 different expense ratios) and make that decision simply by using what is referred to as “reasonable care”. Reasonable care turned into a sad joke in the advisor community as many advisors would select an expense ratio that had a commission built into the expense ratio thus inflating the funds cost to the end user.
The new DOL rule or the Fiduciary Rule holds the advisor to a higher level when selecting not only the investment fund for a plan but ALSO the corresponding expense ratio for that fund. In other words if an advisor is considering recommending a fund to a client and that particular fund has 5-6 different expense ratios it is hoped-all other things being equal- that the advisor selects the expense ratio for the fund that is the least expensive to the client. The DOL expects about 40 billion dollars’ worth of savings with this rule now firmly in place.
To put this in a different perspective let’s say that you go to a car dealership and you are looking at two identical cars. One is 5k more expensive than the other one. Which one do you buy? Of course you buy the less expensive one. In the future plan sponsors should not even have to go through this exercise and hope that their advisor can act as a fiduciary which will require the correct (lowest cost) expense ratio is selected for each of the funds in the plan.
In summary, brokers collecting commissions from any type of retirement plan and not acting in the best interest of their clients will be exiting the 401k business as the advisor groups that work exclusively as fiduciaries and don’t collect commissions should be in the best position to help retirement plans-with a lower fee structure-thus creating a better chance for each plan participant to achieve retirement plan success.
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