Employers want fiduciary duty for 401(k) plans, AARP survey finds

Brokers say they already work in clients' best interest, but formalizing it will eliminate their ability to service small accounts

Apr 30, 2014 @ 1:02 pm

By Mark Schoeff Jr.

An overwhelming number of employers who have retirement plans are in favor of having their plan adviser adhere to a fiduciary standard, according to a new study.

On Wednesday, AARP released a study that shows that 89% of 401(k) sponsors favor a fiduciary duty for advisers to those plans. The results are based on responses from 3,010 employers who were surveyed between July and September 2013.

AARP, which has 38 million members, has been one of the leading proponents of a pending Department of Labor regulation that would increase the number of financial advisers who are considered fiduciaries under federal retirement law.

The rule was first proposed in 2010 but withdrawn after fierce resistance from the brokerage industry, which asserted that it would place brokers selling individual retirement accounts under the fiduciary duty for the first time, raising their costs and potentially pricing middle-income investors out of the advice market. A re-proposed rule is expected later this year.

The AARP survey of employers follows one from May 2013 that showed that 93% of employees also want advisers to their retirement plans to adhere to a fiduciary duty.

“No matter who we ask, everyone seems to agree that the right standard for advice should be advice that is in the best interest of folks trying to save for retirement,” said Cristina Martin Firvida, AARP director of financial security and consumer affairs. “We continue to urge the Department of Labor to proceed with an updated rule that ensures greater financial protection for workers and their families.”

A lawyer representing brokerages and other financial institutions, however, said the AARP study misses the point of contention over the potential DOL rule. Brokers operate under a suitability standard that requires them to sell products that fit a client's needs but allows brokers to put clients in those with higher fees.

“The industry is not opposed to requiring advisers to act in the best interest of their clients,” said Kent Mason, a partner at Davis & Harman. “The policy debate is about whether the [DOL's] prohibited transaction rules will eliminate the ability of advisers to provide service to smaller accounts.”

The vast majority of IRAs contain less than $25,000 and are serviced by a broker, according to Mr. Mason, but DOL rules do not allow the compensation of advisers to vary based on the products they recommend. A broker cannot sell mutual funds that offer different levels of compensation.

“The DOL [rule] would make the brokerage model illegal,” Mr. Mason said.

Barbara Roper, director of investor protection at the Consumer Federation of America, dismissed Mr. Mason's assertion. She said that the Department of Labor has made clear that commissions will be allowed under a new fiduciary-duty rule.

“Arguing that the broker-dealer model won't be permitted ignores everything the DOL has said for months about what the re-proposed rule will look like,” Ms. Roper said.

Although the AARP survey shows that plan sponsors want their advisers to act in the best interest of their employees, it also shows that 91% believe that their advisers are doing so now.

Skeptics of the DOL rule point to that finding as a reason why DOL should not move forward.

“They already believe, without the formality of a fiduciary duty, that they're already getting it,” said John Nichols, president of the Disability Resource Group and president of the National Association of Insurance and Financial Advisors. “If we're already feeling we're getting it and we make changes [to advice rules], what's the consequence of those changes? What's the impact on consumers?”

But the high percentage of plan sponsors who say they are receiving a fiduciary level of care is more reason for DOL to advance its rule, Ms. Firvida said.

“There is no question there is this gap between what folks want and what they think they are getting,” she said. “There seems to be a lot of room to shed sunlight on what is actually happening with the advice that plan participants are being given.”

Registered representatives, such as those who belong to NAIFA, are acting in the best interest of their clients, Mr. Nichols said. For instance, Mr. Nichols said he walks clients through a discussion that includes their goals and current financial position.

“I live that model,” Mr. Nichols said. “That model is needs-based; it's relationship based. There is a process.”

But the status quo hurts investors, Ms. Roper said.

“The difference between not the worst [advice] and not the best has potentially huge implications for investors, and that's what fiduciary duty is designed to address,” Ms. Roper said. “Regulators would not be spending this much time and taking this much heat if everything is fine the way it is now.”

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