When implemented in full, the Department of Labor’s (DOL) Fiduciary Standard (“the rule”) will, without question, change how investment advice is delivered to retirement investors. The dynamics between the advisor and client / participant will be altered forever, some say to the detriment of the client while others cheer that the changes are long overdue.
Regardless of which side of the argument you align with, what is the best measure of progress toward success? Will it be status quo in spite of the new rules or will retirement outcomes for tomorrow’s retirees be markedly better because of the rule?
I believe there are reasons to be very optimistic about the retirement outcomes of those who start saving under the new fiduciary regime. The “North Star” that Secretary Perez and Phyllis Borsi pursued with the rule – a best interest standard – will be realized and as a result, will have positive outcomes for Retirement Investors. But, we can’t wait 40 years for the Millennials to start retiring to find out if the rule hit its mark. So, what metric(s) should we track NOW to determine if the new rules will lead to better retirement outcomes in 2055?
There are provisions in the rule that have a real chance at addressing two problems that routinely torpedo the plans of many well-intentioned retirement investors – education and fees.
The rule gives Plan Sponsors and Plan Providers the freedom to provide participant education without the fear of being held liable as long as no specific investment advice is given, i.e. pick this fund over this fund. This is major! Many plans are worried about the fiduciary implications of educating participants to the point that plans have historically done little on a recurring basis. The new rules are very clear about what constitutes advice, and participant education done correctly is not advice. However, one mistake that the industry makes is assuming that financial literacy is the key to a successful retirement. That is, if only participants were financially literate, they would make the right choices. That is patently untrue. [Cormier, Boston Research Technologies, 2015] So, that begs the question, what to educate participants on? The fund lineup? Consequences of not saving for retirement? The answer is that it depends on the participant … and plan sponsors must discover what those participant personas are in order to address all of the plan’s educational needs appropriately. Doing so will lead to successful retirement investors and the new rule fully supports retirement plans that have a progressive mindset toward helping participants succeed.
Secondly, and probably more importantly, provisions in the new rule will change the economics of a retirement plan, particularly for plans with a “per participant” fee structure for recordkeeping services in place. As it applies to ERISA plans, Sections II (b) – II (e) of the Best Interest Contract Exemption (BICE) require 1) the acknowledgement of fiduciary status, 2) firm and advisor adherence to the Impartial Conduct Standard, 3) warranties that policies and procedures exist to ensure adherence, and 4) disclosures of proprietary products, third-party payment and limits to investment choices. These elements when enforced will empower the Plan Sponsor and Participants in new ways. The rules are also clear that low fees are not a litmus test fiduciary responsibility. However, by eliminating the practice of “pay to play” by Plan Providers, minimizing the influence of advisor fee compensation in the investment selection process and by focusing on performance and manager due diligence, the industry will naturally separate out winners and losers in the asset management product universe which will improve outcomes for all investors. Lower fees on asset management products is great news for those saving for retirement … remember 50 bps on $1,000 compounded annually at 5% for 40 years is … well, it’s a lot of money. But to the naysayers, it’s not just lower fees because the government puts a cap on them – it happens through competition and by rewarding better performance.
However, there’s a huge intangible benefit we will all reap if the new DOL rules succeed in their mission … Trust … in your advisor, in the US retirement system, in your employer, and in the idea of a well-deserved, successful retirement for people who play by the rules.