While your car insurance may be in good hands, what about your retirement plan? In light of the recent changes to the Department of Labor’s (DOL) definition of “fiduciary”, you may want to find out.
In April of this year, the DOL regulations declared war on the financial industry’s ongoing lack of accountability, broadening the definition of what it considers fiduciary advice. Although the regulations total seven documents and over 1,000 pages, the gist of it is this: advisors on retirement plans now face a requirement to do what’s best for their clients. Crazy, right?
What Are You Paying For?
Most advisors currently working in the retirement plan industry do not face this requirement. In fact, many advisors cannot provide fiduciary advice. Their employers don’t want the liability if anything goes wrong. Accountability, you see, makes them uncomfortable. But these advisors still “advise” on retirement plans. Their broker-dealers, you see, do allow them to collect healthy fees and commissions for providing “education”; education which you can find on YouTube for free.
So let me ask you a question: why are you paying thousands of dollars for a few hours of education each year? Some over-priced middle-men masquerading as advisors might object to that classification. “We’ve outsourced the fiduciary management (referred to as a “3(21) or 3(38) fiduciary”) so our clients have the same fiduciary oversight.” And that may be true. But then, I wonder, why is their purpose? By employing an advisor who outsources the fiduciary responsibility, you are paying someone called an “advisor” for access to someone else who advises.
But in today’s world of decentralization, you don’t need to pay to have access. Many fiduciary managers are for hire direct. Why pay thousands of dollars to an advisor who delegates the advice to someone else at a fraction of the price? If you needed house-cleaning, would you pay Company A $2,000 per month to find Company B to clean for $500?
The financial crisis was crucial in exposing the pervasively poor management inside many retirement plans. And as a result, advisors are now increasingly facing scrutiny from former employees, the DOL, and “ambulance-chasing” lawyers. And rightly so. Participant portfolios often suffer from high fees or poor investment choices. This is largely because plan fiduciaries can’t keep up with their responsibilities and incorrectly assume their advisor is.
DOL Regulations And Your Advisor
“But my advisor gives advice,” you say. And that may be true, but that means your problem may be even worse. There are advisors who legally can’t give advice but do anyway. These advisors and the plans they manage are an accident waiting to happen. The last thing you want is to be paying for advice from someone who is not legally responsible for it. Either these individuals are ignoring the risks, or in their ignorance they do not know better. With the onslaught of new regulations, however, this category of “advisor” isn’t likely to last.
Ultimately, plan sponsors are left with two choices: “advisors” who don’t give investment advice, and fiduciaries who do. The difference between the two is vitally important when it comes to evaluating your liability exposure. Hiring a fiduciary manager to implement and monitor the investments in your plan reduces your liability exposure. In the event of a lawsuit or DOL audit, you have a expert specifically to cover your liability.
If, however, you enlist the services of an advisor who isn’t a fiduciary – but who may give poor advice anyway – you retain all the fiduciary responsibility. What was that? You think someone who collects thousands of dollars a year to “advise” your plan should share responsibility? We agree, but unless your advisor signs on as a fiduciary, they don’t.
There are lots of expensive advisors out there, but very few who can legally give advice on your retirement plan. With the latest regulatory changes coming into effect in 2017, now might be a good time to ask your advisor: are you acting in a fiduciary capacity? The answer may surprise you.
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