4. Why is the Labor Department doing this now?
The Labor Department is playing catch-up, says Michael Kitces, director of wealth management at Pinnacle Advisory Group in Columbia, Md. When the federal pension law was established, it set a standard for traditional pensions. At the time, IRAs were brand new and 401(k)s didn’t exist.
But as pensions disappeared and were replaced by 401(k)s and similar plans, the investment decisions fell on workers. There were no protections under the old law to make sure these employees received appropriate advice, Kitces says. The new rule is meant to correct that.
5. Will workers in 401(k)s notice a difference?
Not so much. But where the rule should have the biggest impact is on workers on the cusp of retirement who seek advice about rolling over their 401(k)s into an IRA.
“Often they are most vulnerable at that point,” says Betterment’s Stein. “That’s when they are being sold some kind of product from someone holding themselves out as an adviser.”
Another group likely to see a significant change are small employers and their workers, Roper says. “The costs in small plans are appalling. They can be so high they eat up all of the tax benefits,” she says.
Going forward, the advice these employers receive from brokerages and insurance companies on investment options in plans will have to meet the fiduciary standard, she says. This ultimately will drive investment costs down, Roper says.
6. Does the rule mean the adviser must always recommend the investment with the lowest fee?
No. An adviser could suggest, say, a mutual fund with a slightly higher fee because it boasts a strong money manager.
“You don’t have to recommend the cheapest, but you do have to defend why you recommend something else and why it was in the client’s best interest,” says Sheryl Garrett, founder of the Garrett Planning Network in Eureka Springs, Ark.
However, if the investment choice is between two nearly identical funds, the broker will have to recommend the less expensive one, Kitces says.
7. Does the rule eliminate commissions that advisers earn selling particular investment products?
No, but it will require that these payments be clearly disclosed, Stein says.
8. What other changes can consumers expect?
Early next year, retirement advisers will have to provide updated contracts to clients stating they are a fiduciary, as well as disclosing compensation and any conflicts of interest.