Now that the industry knows the DOL fiduciary rule will go into effect on June 9, it's important to step back and understand what's at stake and who stands to benefit from — or be hurt by — potential revisions to the rule, which may happen before the end of the year.
Some groups like the Investment Company Institute and Securities Industry and Financial Markets Association wanted the Securities and Exchange Commission to be the first mover with a fiduciary standard for investment advice, while others are pushing for simple disclosure rather than elimination of conflicts of interest.
But would simple disclosure for the fiduciary standard be effective? We only have to look at retirement-plan fee-disclosure rules from 2012 — the 408(b)(2) and 404(a)(5) rules — to see that it likely wouldn't.
The SEC tends to protect investors through disclosure, while the DOL seeks to outright eliminate issues requiring disclosure. That's probably because there's a fundamental difference between the investors protected by the SEC, who tend to be more sophisticated, and those under the DOL's protection, who are participants in workplace retirement plans.
Most of the 80 million participants in defined-contribution plans like 401(k)s have limited assets and aren't attractive clients for most advisers. Many workers become accidental investors automatically enrolled in their employer's DC plan, enrolled into a default fund chosen for them.
The Employee Retirement Income Security Act of 1974, which governs 401(k) plans, also says fiduciaries must avoid, not disclose away, conflicts.
Providing disclosure about conflicts would do little to help or protect DC investors, and wouldn't benefit the experienced DC plan advisers who are already acting as fiduciaries.
The 408(b)(2) regulations from 2012 imposed new disclosure requirements on service providers, mandating they furnish certain compensation information to plan sponsors; 404(a)(5) rules govern new participant-level disclosures from the plan administrator.
After well over 200 half-day training programs with almost 4,000 DC plan sponsors conducted through The Plan Sponsor University since 2013, I have yet to meet even one sponsor who has taken the time to read their 408(b)(2) disclosures and completely understands them. I expect the results would be the same for plan participants and 404(a)(5) disclosures.
If fiduciary advisers eliminate rather than disclose conflicts, will plan sponsors and plan participants be better protected? Like under the ERISA sole-benefit rule, which says fiduciaries must act in the sole benefit of participants, advisers holding themselves out as fiduciaries should put their clients' interests first; that means, in part, that their compensation should be the same regardless of the recommendation. There's no disclosure that would be as effective.
Though the implementation of the DOL fiduciary rule may be awkward and painful for DC plan advisers and DC-focused brokers-dealers and registered investment advisers, they realize the new fiduciary standard will ultimately benefit them and their clients.
Dedicated DC plan advisers with at least $25 million in DC assets under management and five plans represent just 10% of the advisers working in the DC market, yet they manage 50% of the plans and over two-thirds of the adviser-sold DC assets, according to research conducted this year by The Retirement Advisor University. Most advisers already are acting as a named fiduciary for their DC plan clients, while others are functional fiduciaries just waiting for their broker-dealers to catch up.
And focused distributors are using the new fiduciary standard to force inexperienced advisers to either work with specialists on larger plans or a third-party fiduciary for smaller ones, leveraging the DOL rule as justification. As a result, some distributors like Merrill Lynch are aggressively training more advisers to work as DC plan fiduciaries.
So, in essence, the DOL rule is forcing out inexperienced plan advisers, and more plans and participants will have access to experienced fiduciary DC-focused advisers. That's not likely to happen as dramatically or quickly, if at all, under simple disclosure or suitability rather than fiduciary requirements.
That raises more troubling questions. Should associations and lobbyists sacrifice the interest of DC participants to protect their constituents while claiming they are for a fiduciary standard in name only? And which constituents are they protecting if DC-focused advisers and distributors are better off with elimination, not disclosure, of conflicts of interest in DC plans?
Fred Barstein is the founder and CEO of The Retirement Advisor University and The Plan Sponsor University.