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As Brokers Cheer, Advisers Sound Off on DOL 401k Fiduciary Capitulation

September 22
00:02 2011

One might be excused if one twists in ironic confusion when reading the DOL’s press release announcing their decision to re-propose its rule on the definition of fiduciary. On one hand, EBSA Assistant Secretary Phyllis C. Borzi says, 1111229_77408506_volume_knob_stock_xchng_royalty_free_300“Investment advisers shouldn’t be able to steer retirees, workers, small businesses and others into investments that benefit the advisers at the expense of their clients. The consumer’s retirement security must come first.” On the other hand, the release promises “the agency will carefully craft new or amended exemptions that can best preserve beneficial fee practices.”

Since a fiduciary cannot serve two masters (indeed, a “fiduciary,” with eight centuries of definition behind it, can only serve the beneficiary), it only makes sense that a rule pertaining to the definition of fiduciary serve only one master. Oddly, the DOL’s original proposal allowed brokers to continue receiving transaction-based fees normally prohibited within a fiduciary relationship. The protection of self-dealing transactions stands out as of the primary points extracted from King John by the abused English barony in the signing of the Magna Carta (see “7 Deadly Sins Every ERISA Fiduciary Must Avoid: The 1st Deadly Sin – ‘Income Matters’,” Fiduciary News, May 24, 2011). Sure, it cost the King’s men, but wasn’t that the whole point of the protection?

Chances are, very few 401k plan sponsors and precious few 401k plan participants even noticed the recent goings-on at the DOL and how they just lost valuable protection so big brokers could line their pin-striped pockets with a big chunk of somebody else’s retirement assets. Once again, as we’ve seen with both pieces of 2010 signature legislation, big business has colluded with big government at the expense of small business and everyday citizens.

While those with the most at stake toil away unawares in their everyday lives, registered investment advisers from across the country have begun to speak out against this unholy alliance consisting of big banks, brokers and insurance companies on one side and big government on the other. Most feel the immediate impact of the DOL’s surprising politically inspired retreat is harmful to retirement investors.

From the heartland of America comes this statement. “We were hopeful the DOL would act requiring clear and simple disclosure to participants on conflict of interest and whether or not the adviser is acting in the sole best interest of their client,” says Scott Holsopple, President & CEO of Smart401k, Overland, Kansas. He adds, “Postponing the definition puts retirement investors behind the financial services industry in order of importance. Waiting to clarify conflicts of interest will not serve the participants.”

From the deep south, Brooks Mosley, President of Independent Pension Solutions in Jackson, Mississippi agrees. He says, “Most retirement plan participants don’t understand whether their plan is overseen by a fiduciary or not. A true fiduciary has the responsibility to make recommendations in the participant’s best interest while a broker’s incentives may not be as closely aligned with the participant. In the absence of fiduciary responsibility a broker’s motivation could be to recommend plan options with the best commissions. A fiduciary is required to recommend prudent investments at reasonable costs.”

From the west coast, Timothy R. Yee, a registered Principal at Oakland, California’s Green Retirement Plans, Inc. believes the DOL’s withdrawal of its proposed new fiduciary rule “hurts investors in that certain advisors will not be held accountable for their actions. Simplistically, good advisors will continue to do the right thing (fiduciary standard by definition) for their clients, standard or no standard. The bad apples will continue bad behavior.” Yee states the DOL’s proposed new fiduciary rule “would have allowed the pursuit of these bad apples.”

From New England comes an echo of these concerns. Katie Umile, CEO of iCapital, LLC in Boston, Massachusetts says, “The withdrawal of the proposed fiduciary rule may harm investors when investment share class decisions are made under the suitability standard, while the fiduciary standard would require the lowest available share class. Participants could be negatively impacted if considerations other than a duty to the plan participant influenced selecting the suitable, higher share class for inclusion in the plan.” This ultimately leads to her (and the retirement plan investor’s) biggest concern: “Additional expenses over many years could result in lower account balances at retirement, directly impacting plan participants.”

From the nation’s much maligned rust-belt, perhaps James Lange, CPA/JD of Pittsburgh, Pennsylvania’s Lange Financial Group LLC, puts it most succinctly when he says the DOL’s original proposal “was aimed at changing the playing field so more financial professionals would have been required to put their clients’ interest first.” Does Lange feel the DOL’s capitulation will hurt retirement investors? “Obviously,” he says, “if a retiree is working with someone, they should have a strong preference knowing the person they are working with has their best interest at heart and is required to have their best interest at heart.”

Finally, from cyber-space, Andrew Schrage, Founder/Editor at Money Crashers, an internet-based financial education site provides this blunt comment: “The key way retirement investors will be affected is they will continue to be liable to receiving investment advice from people with legitimate conflicts of interest. Until a change to the fiduciary definition is finally implemented, many investors will unfortunately be held victim to the profit-driving motives of many financial planners and advisors in their individual 401k plans and IRA accounts.”

Of all the advisers across the nation Fiduciary News spoke with, only one – Robert Fragasso, CEO of Fragasso Financial Advisors in Pittsburgh – thinks retirement investors won’t suffer because the DOL will re-propose its new definition, resulting in a cleaner version that still addresses the exact same fundamental fiduciary concerns, but will be less vulnerable to legal attacks from irrelevant angles. “It does not hurt investors, as the withdrawal allows for a more circumspect approach,” says Fragasso, “The original DOL proposal spurred unintended consequences. A more considered revision will, hopefully, allow for a reasoned fiduciary approach that addresses the legitimate needs of participants without withholding ancillary services the original proposal subverted.”

Most of these advisers take the DOL at their word in expecting the re-proposal to be issued in the first quarter of next year although Mosley fears the DOL will “probably wait until after the 2012 election because putting more regulations in place right now would be a lot of pressure for companies.” While Yee agrees the DOL will re-propose sooner rather than later, he says, “there will also be certain industries that do not like this standard, no way and no how.” Yee wants the DOL “to be firm in creating this rule.” He states, “There are times where the medicine must be taken. Look back through history. Certain groups may not like it, but it is needed.”

These advisers have mixed feelings regarding their marketing in light of the DOL’s backing down on a uniform fiduciary standard. “We’re already fiduciaries, so I think it hurts us,” says Mosley. He adds “It would have forced brokers to raise their overall plan costs making the field more competitive overall. We want good funds as plan options and we conduct due diligence. Brokers often get a 1 percent fee on funds directed into proprietary plan options, enabling them to keep general plan costs lower and appear as the more cost-effective option.”

Taking a more optimistic view, Umile says, “When a firm is absent of corporate influence and working in a fiduciary capacity and plan sponsors understand the firm’s legal obligation, it should help to realize growth in the area of retirement plan management.”

Whatever the ultimately outcome of the DOL’s delay, all these advisers agree. Unlevel playing field or not, they still want to operate under the fiduciary standard. After all, as Wilfred Brimley once said, “It’s the right thing to do and the tasty way to do it.”

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. Roger Wohlner
    Roger Wohlner September 22, 17:34

    Interesting article. Chris maybe I’m a bit simple minded, but why would anyone oppose a system where advisors would be required to put the interests of clients, plan participants, etc. first no ands, ifs, or buts about it? Why, two words: greed and self-interest.

  2. Terry Martine
    Terry Martine April 04, 20:25

    Full transparency will be great for the participants wallet and companies providing retirement accounts; however, not everyone is going to like seeing the fees coming out of the account every time they get a statement. In a sense, I am glad I don’t see all the fees every time I get gasoline. It will be a shock at first, but when the dust settles it will be better for the consumer.
    I think the large mutual fund companies are going to have a difficult time lowering the fees enough to compete with ETF’s. Lets face it, if you have a billion dollars in a mutual fund and guarantee to lower the fees to existing mutual fund holders if you come out with a new share class, it’s going to be hard giving up existing revenue.

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