In February, President Trump ordered the Department of Labor (DOL) to review the Fiduciary Duty Rule as a likely pretense for killing it. To complete the review, the DOL delayed the rule’s implementation by 60 days and asked the public for fresh comments.
Smelling blood in the water, the U.S. Chamber of Commerce (COC) – a long-time opponent of the Fiduciary Rule - responded to the DOL with a highly-critical comment letter. They concluded the DOL had “vastly overstated the predicted benefits, and vastly underestimated the predicted costs of the Fiduciary Rule” in their prior analysis. The COC requested a 12-month rule delay “to allow the Department to fully consider the comments it requested on the substance of the Fiduciary Rule, and to draft a proposed regulation revising or rescinding the Fiduciary Rule.”
I’ve always been baffled by the COC’s opposition to the Fiduciary Rule. You don’t need to dig too deep into the rule to understand it’s not just a pro-investor reform - it’s also pro-business. How so? By making it easier for 401(k) plan sponsors to meet their fiduciary responsibilities and lower their plan expenses. While I understand the COC is representing the interests of the financial services industry by opposing the Fiduciary Rule, I think their position is myopic - they should be supporting the rule to better represent their much bigger constituency of 401(k) plan sponsors.
The status quo is a raw deal for business
Today, non-fiduciary financial advisors – like brokers and insurance agents – recommend investments to 401(k) plan sponsors based on a suitability standard of care. The problem? Practically no investment is “unsuitable” using this standard. That means non-fiduciary advisors can steer 401(k) plan sponsors towards investments with hidden fees, outrageous redemption charges and lousy performance to maximize their commissions.
The suitability standard is a raw deal for 401(k) plan sponsors due to their fiduciary responsibility to keep their 401(k) fees reasonable. Because non-fiduciary advisors are free to recommend over-priced investments under the suitability standard, 401(k) plan sponsors must independently evaluate their recommendations for fee reasonableness and conflicts of interest. If they don’t, they risk personal liability while their financial advisor can walk away scot-free.
The Fiduciary Rule puts 401(k) plan sponsors and advisors in the same boat
The Fiduciary Rule would define all financial advisors to 401(k) plans as fiduciaries - today, only financial advisors licensed under the Investment Advisers Act of 1940 are considered fiduciaries. The beauty of rule is that it puts 401(k) plan sponsors and financial advisors in the same boat by making both responsible for keeping 401(k) investment fees reasonable.
This alignment of interests makes the Fiduciary Rule a good deal for small businesses by reducing their potential 401(k) plan liability.
Fiduciary-grade investment advice is often (way) cheaper too!
Opponents of the Fiduciary Rule – including the COC – claim the rule will make investment advice too costly for many 401(k) plans by driving brokers and insurance agents unwilling to give impartial advice from the market. The problem? Good luck finding any evidence that fiduciary-grade advice costs more than conflicted advice today.
In fact, there is evidence to the contrary. Financial advisors ally with service providers like Employee Fiduciary to deliver “bundled” (turnkey) 401(k) solutions to small businesses. Last month, we studied the fees for 525 plans that bundled a fiduciary-grade financial advisor and Employee Fiduciary. We found 401(k) plans with assets between $1M and $5M paid just 0.70% annually for plan administration and fiduciary-grade investment advice. When you add these fees to a low-cost fund line-up, a 401(k) plan can save more than 50% over the cost of the typical 401(k) plan with assets over $1M. That’s a huge savings!
Wake up, COC! The Fiduciary Rule is good for business
There is no question the Fiduciary Rule will hurt the bottom line for many financial service companies that profit from conflicted retirement plan investment advice – possibly reducing their revenue by as much as $17 billion per year! That’s a huge hit, which is why these companies are throwing the kitchen sink at fighting the rule.
To date, the COC has supported the financial service companies fighting the Fiduciary Rule. I don’t think they’re looking at the big picture. The rule is not just a pro-investor reform – it’s also good for business. It will help 401(k) plan sponsors reduce their fiduciary liability, while likely lowering their 401(k) plan expenses. It’s time for the COC to wake up and support the rule.