One of the great things about being a reporter is meeting all kinds of really smart people for all different walks of life. Fortunately, these people are kind enough to share their thoughts and opinions. This allows readers to gain the benefits of their insights and perspectives. Such was the case recently (see "What Will 2013 Bring to the World of 401k?" FiduciaryNews.com, January 8, 2013).
What amazed about that story was this: Of the four thought leaders interviewed, two agreed with the consensus that the DOL will finally issue its new Fiduciary Rule this year and two agreed the DOL would not issue a final rule on the subject. All four are close to Washington decision makers. Not one or two of them have any special "inside" knowledge. Yet, they're evenly split on the issue.
Here's what makes the matter even more interesting: The DOL has already come out and promised it would deliver a new Fiduciary Rule this year. (Contrast that to the SEC, which, although it promises to continue to look into the matter of the fiduciary standard, makes not such assurance it will actually decide on the issue anytime soon.)
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As with any looming regulatory change, those involved in the affected industry find themselves in a rather precarious position. It has come to the point where the uncertainty is far worse than any single decision. Therefore, the sooner the matter is resolved, the better it is for all players.
The case of the Fiduciary Rule impacts all facets of the retirement investors – from ERISA plan sponsors to individual IRA holders. On the other hand, it only impacts a portion of the service providers.
Let's tackle investors first. They come in two flavors: 1) The plan sponsor responsible for selecting the vendor on behalf of other investors; and, 2) The individual investor responsible for selecting the vendor solely on his own behalf. For plan sponsors, the issue has the potential, like last year's fee disclosure rule, to increase fiduciary liability just as much as it can reduce fiduciary liability. We'll get to the reasons why when we talk about how the Fiduciary Rule can impact vendors in a moment.
For individual investors, applying the Fiduciary Rule to IRAs will enable retail investors to avoid more expensive investment products and might even funnel these individuals into more formal investment advisery relationships. This latter fact is significant because studies have shown non-professional investors do better under the guidance of a fiduciary.
Which gets us to the financial service providers themselves. In the case of investment advisers already registered with the SEC, these folks are currently defined as fiduciaries, so any broadening of the rule will not affect them. On the other hand, other service providers – primarily brokers and insurance salesmen – are likely to be included under the umbrella of fiduciary, albeit with some "opt-out" provisions, which may be as simple as disclosure saying they are not providing fiduciary (i.e., investment) advice.
It's these "opt-out" provisions which may spell trouble for plan sponsors. While utilizing the "opt-out" provision may be good for the service provider (it reduces their liability), continuing to contract with a non-fiduciary service provider will likely increase fiduciary liability for the plan sponsor.
Most plan sponsors don't like to increase their personal fiduciary liability. If they can do anything about it, they will. As a result, service providers who "opt-out" of the Fiduciary Rule may soon discover they're opting out of the market entirely – and not by choice.
In either case, a definitive decision by the DOL in 2013 – one I believe they will make – will have the advantage of clarifying the investment advice market, at least as it pertains to the retirement arena.
Now if we can only get the SEC off its derriere.
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Christopher Carosa
Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).
