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3 Great Ways the New DOL Investment Advice Rule Helps the 401k Fiduciary

April 06
22:16 2010

642736_76463569_dice_craps_stock_xchng_royalty_free_300Are you breathing a sigh of relief? ERISA plan sponsors – the 401k fiduciary in particular – have now had a little more than a month to digest the Department of Labor’s proposed new Investment Advice Rule (“DOL Releases New Investment Advice Rule: More (or Less?) Trouble for the 401k Fiduciary,”, February 26, 2010). Commentators have coalesced around several key benefits of the proposed Rule.

  1. The Rule “bans” conflicts-of-interest – advisers can no longer direct plan participants to investments in which the adviser has a pecuniary interest (“New Rules on 401(k)s, IRAs Roil Advisers,” Robert Powell, MarketWatch, March 2, 2010). Well, upon reading the fine print, it doesn’t really ban conflicts-of-interest, but it does discourage them. The DOL will continue to offer an exemption on prohibited transactions by advisers if those advisers employ a fee-level arrangement and use a computer model – i.e., one regularly audited to insure it contains no bias – to proffer advice.
  2. The Rule requires all investment advisers to disclose their fees (“Proposed 401(k) Plan Regulations Aim For Enhanced Transparency,”, February 26, 2010, “Suddenly, 401k Fee Disclosures Getting Plenty of Attention,” Investment News, March 15, 2010). What can insure the conflicted adviser does not direct the investor into funds that generate additional revenues to the adviser? We seem to live in the era of transparency, and, consistent with this, full, open fee disclosure will let the plan participant (and the plan’s corporate fiduciaries) know with certainty if the adviser may be taking advantage of the plan in any way.
  3. The Rule forbids brokers (i.e., non-fiduciaries) from giving investment advice – they may only provide education on investment options (“New Retirement Plan Rules Could Hurt Brokers,” CNBC, March 26, 2010, “Rep or Fiduciary? Labor Department Says, ‘Choose,’” Investment News, March 14, 2010). While generating controversy within the industry, this benefit may rise to become the most important for the 401k investor. The fiduciary requirement raises the level of responsibility for the financial service provider. Registered Investment Advisers already serve as plan fiduciaries, so this requirement changes nothing for them. Brokers, on the other hand, appear to be the service providers most impacted by this requirement. Transforming from the less rigorous “suitability standard” to the more stringent “fiduciary standard” can present problems for a typical broker’s business model. It does, however, offer tremendous benefits for both plan participants and plan sponsors.

Alas, the Lord giveth and the Lord taketh away. It seems no matter how honest their intentions, with regulators, for every action there is an equal and opposite reaction. Be sure to read our companion piece: “3 Terrible Problems the New DOL Investment Advice Rule Poses to the 401k Fiduciary,”, April 6, 2010.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


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