Have You Heard About The New Fiduciary Rule?

moneyMy Comments: This falls into a ‘did you know’ category. You’ll find an explanation of the term ‘fiduciary’ in paragraph four below.

Many of my followers are employed by universities and colleges, cities and counties, and other not-for-profit organizations across the country including churches. If this is you, then you may have money in a retirement plan sponsored by your employer, and it falls under IRS Code Section 403(b).

If you are employed in the private sector and have an employer sponsored retirement plan, then you fall under IRS Code Section 401(k). Or you might simply have an IRA account somewhere.

There is a new rule that will take effect on April 10, 2017, unless the Trump administration kills it, which they’ve said they will. The rule says that if I give you financial advice about your retirement money, that advice must be in YOUR best interest. I can’t just sell you something that is more or less suitable for someone your age; it has to be in your best interest.

A similar rule applies to doctors, attorneys, CPAs and architects, and has done so forever. The new rule says if I don’t act in your best interest, within the scope of an understanding of what exactly is in your best interest, I can be held accountable under the law and not be able to walk away saying “buyer beware”.

Here in Gainesville, Florida, there are tens of thousands of employees of the University of Florida, of Santa Fe College, of the City of Gainesville, of Alachua County and so on. If any of them participate in a sponsored plan, whomever is giving them advice is exempted from the new fiduciary rule.

That’s not to say that their advisor is not willing and able to be bound under a fiduciary standard, but it does say that neither they nor the firm they work for will be held accountable as a fiduciary if the new rule didn’t expressly exempt 403(b) accounts.

Buyer beware indeed.

By Mark P. Cussen, CFP®, CMFC, AFC | November 1, 2016

The Department of Labor’s (DOL) new rules that automatically elevate all financial advisors who work with retirement plans or accounts to the status of a fiduciary have already had a substantial impact on the retirement planning industry. Large firms are spending millions of dollars in their effort to restructure their business and compensation models to comply with these regulations. The goal of the new rule is to prevent advisors from recommending products that pay high commissions to them, but aren’t necessarily in the best interests of the client.

However, the new rules only apply to IRAs and qualified retirement plans in the private sector. They do not apply to 403(b) or other retirement plans that are used by non-profit entities that qualify as charities under Section 501(c)3 of the Internal Revenue Code. And this segment of the retirement planning market is considered one of the worst when it comes to plans that have high fees, poor investment choices and lax management by plan custodians.

The Need for Reform

403(b) plans in particular are common retirement plans for educators. Marcia Wagner, principal at The Wagner Law Group, told InvestmentNews in an interview, “It’s almost laissez-faire. The teachers can be marketed by people who are very good providers to the marketplace and people who aren’t, and it’s a problem.” Despite their similarity to qualified plans in terms of contribution limits and plan sponsorship, 403(b) plans do not fall under ERISA guidelines and are therefore not subject to the new requirements of the DOL rule.

Jania Stout, the practice leader and co-founder of the Fiduciary Plan Advisors group at HighTower Advisors echoed Wagner’s sentiments in an interview with InvestmentNews. “It’s kind of like the Wild, Wild West. Teachers are really at the mercy of whoever’s sitting in the cafeteria they’re walking into that day. It could be a good representative. Or they’re trying to put them in a product that’s two or three times more expensive.”

Other Exempt Plans

Private plans at higher educational institutions and some churches are also exempt from ERISA guidelines as well as state and federal defined contribution plans, such as the thrift savings plan. It is also possible to structure a plan that would normally fall under ERISA guidelines so that it becomes exempt, such as by prohibiting employer contributions. 457 plans are also immune from ERISA regulations. (See also, The Fiduciary Rule’s Impact: How It’s Already Being Felt.)

And some schools even set up their plans with an open type of arrangement where any vendor can offer investment options in their 403(b) plan as long as certain requirements are met. There are consequently some plans that have over a hundred different vendors offering investment alternatives to plan participants. Obviously, this level of diversity gives the plan participants thousands of investment options to choose from, which can be overwhelming for many participants who are not financially savvy. And many participants also have no idea how much they are paying in investment fees.

TIAA-CREF published a report in 2010 that revealed the average annual asset management fee for school retirement plans in the state of California was a whopping 211 basis points, while participants in Texas school plans were paying 171 basis points. Both of these states use the open-access approach with their plans. But participants in schools in states with controlled access paid much less. Plan participants in Iowa and Arizona only paid 87 and 80 basis points per year for each of those respective plans.

The Bottom Line

Although the sponsors of plans that fall outside of ERISA guidelines will not be legally required to meet the requirements of the DOL’s new fiduciary rules, they may feel pressure from their members or from the school districts to begin moving in that direction. Time will tell how the DOL fiduciary rule impacts these plans.

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