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Washington Earthquake May Shake 401k Fiduciaries & Plan Sponsors (Part I of II)

July 19
21:32 2010

The U.S. Geological Survey reported an earthquake measuring 3.6 on the Richter Scale shook Washington D.C. shortly after five o’clock on the morning of Friday, July 16th, 2010. However, the ground breaking events delivered out of the nation’s Capital on July 15th, 2010 may have a more seismic impact, resounding from Main Street 908169_93843680_earthquake_stock_xchng_royalty_free_300to Wall Street. While most expected both the eventual passage of the Financial Reform Act and the Department of Labor’s (DOL) issuance of final rules regarding 401k fee disclosure, reaction was swift, controversial and, in the case of the financial markets, decisively negative. For 401k plan sponsors and fiduciaries, however, this one-two punch signals the start of significant changes in the way they operate their plans.

Part I: Senate Approves Financial Reform Act

The White House claimed “victory” when the much maligned Financial Reform Act barely passed the Senate with just the minimum number of votes (“Senate Passes Sweeping Finance Overhaul,” Wall Street Journal, July 16, 2010). Setting aside the debate as to whether the bill actually reforms anything dealing with the 2008 meltdown (“How Washington Lobbyists Shaped the Financial Reform Bill,” Time Magazine, July 12, 2010), the legislation does contain big news for 401k plan sponsors and fiduciaries. After months of negotiations, the House and the Senate reconciliation process agreed to push the Fiduciary Standard forward (albeit, as some have complained, by dumping it into the SEC’s lap – one of ten regulatory agencies the law tasks with writing the new rules of the road).

The course for adopting a Fiduciary Standard starts with a six-month study by the SEC to determine if we should even adopt a Fiduciary Standard to begin with. Once the SEC completes its study – and assuming it desires to adopt a Fiduciary Standard – it will propose a draft, similar to the way the DOL presented a draft for the new 401k Investment Advice Rule earlier this year. After a predetermined period allowing for public comments, the regulator will assess the implications of the proposed rule before issuing a final rule. It’s only following this extended tango between lobbyists and regulators that the real fun begins – and no one can say how it will turn out.

Complicating the rigors of any ultimate Fiduciary Standard, the legislation passed by Congress deems any broker “Selling in-house or ‘proprietary’ products or receiving commissions won’t necessarily violate a new standard.” (“Reform Bill Means Changes For Advisors, Now And Later,” Financial Advisor, July 15, 2010). It’s unclear if this stipulation, in fact, places the Fiduciary Standard dead-on-arrival even before the SEC has a chance to launch its study.

Susan John, CFP, Chair-Elect of the National Association of Personal Financial Advisors (NAPFA), expressed some displeasure with the potential loopholes in the Act. “We are disappointed it is not clear to our leaders that advisors should work in the client’s best interest at all times,” she said in a statement provided exclusively to Fiduciary News. “We hope the [SEC] study will make it absolutely clear the fiduciary standard, with its duties of loyalty and due care under the ‘40 act, is what the public expects,” she adds. She concludes with the fact her group continues “to have concerns the result will be a system in which consumers continue to be confused about whether advice is advice or a product sale. We will be watching the rule making that comes about subsequent to the study very carefully.”

In a July 15, 2010 press release issued by the Financial Planning Coalition, which represents three large industry groups (the Certified Financial Planner Board of Standards, The Financial Planning Association (FPA) as well as the NAPFA), says “Our efforts paid off.”  The group had previously said its “major area of focus was to support the extension of the fiduciary standard to brokers who give personalized investment advice.”

Even if the SEC goes forward with adopting a universal Fiduciary Standard, not all service providers will feel an impact. Phillips Hinch, Assistant Director for Government Relations at the Financial Planning Association says his organization hasn’t “heard from our members expressing concerns about the Fiduciary Standard since they’re already operating under the Investment Advisers Act of 1940 or through the FPA Ethics Policy.”

Tomorrow: Part II of the “The Day Washington Shook the 401k World” continues with an assessment of the DOL’s new 401k fee rules.

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About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. Roger Wohlner
    Roger Wohlner July 19, 22:40

    I agree with Susan John. My fear is any Fiduciary Standard that emerges will lack any real “teeth” and worse will leave the public confused about who is and isn’t working in their best interests.

  2. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author July 19, 23:22

    Thanks for the comment, Roger. I’m wondering how many others have picked up on this.

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