The regulatory environment for financial advisors is in flux. Most significant among these changes is what standard of care advisors will adhere to when serving the public. Advisors who are fiduciaries are legally and ethically obligated to do what is in their clients’ best interests.
Brokers, on the other hand, have no current legal obligation to do what is best for their clients. They are held to a lower standard which says their advice only has to be “suitable” for a particular client’s situation.
The difference between these two standards is immense and consequently brokers often find themselves in situations where a conflict of interest exists. That, however, may soon change – at least as it relates to 401k plans.
The Department of Labor is considering a proposal that would expose conflicts of interest in retirement plans by requiring brokers to declare whether they are acting as fiduciaries. In most cases, brokers are not required to act in a fiduciary capacity, so this will be an eye opener for companies with 401k plans.
An additional provision would require brokers to provide detailed overviews of their services and sources of compensation. This disclosure may also come as a big surprise to plan sponsors.
Along with these new rules for brokers comes a higher standard for the plan sponsors themselves. Sponsors who fail to perform their fiduciary obligation to employees will face severe consequences, including fines, lawsuits, and plan disqualifications.
If you are a 401k plan sponsor, here are some questions to ponder as we prepare for the new 401k fiduciary landscape: Do you have and follow a written Investment Policy Statement? Have you had a service provider review and investment review within the past 12 months? Do you have committee meetings and do you document the minutes? Do you have a broad range of investment options selected based on prudent criteria? Have you provided participants with certain required information as well as a list of optional information they can obtain by request? How much are you paying for your plan and where is it disclosed in plain English?
If these changes come to pass, we think they’ll be an improvement. Employers will know if their 401k provider’s incentives are truly aligned with their own and employees will rest easier knowing that their employer is being held accountable for properly managing the plan.