Government 'mystery shopper' finds IRA fiduciary oversight is lacking

Financial services professionals who act as fiduciaries for Independent Retirement Accounts could face extra scrutiny if new recommendations are implemented.

The Government Accountability Office says that IRA fiduciary oversight is “lacking” and does not adequately protect investors from potential conflicts of interest.

In a report dated July 29 but only made public this week, the GAO says that “the interests of financial professionals and retirement investors often conflict,” citing when financial professionals are paid commission from selling a product to a client, creating “risks for millions of investors with over $18 trillion dollars in retirement savings in 401(k) plans and IRAs.”

This was found in a ‘mystery shopper’ style investigation involving 75 calls by the GAO posing as potential clients, and in an analysis of 2,000 conflict disclosures.

The resulting report, titled ‘Retirement Investments: Agencies Can Better Oversee Conflicts of Interest between Fiduciaries and Investors’ also found that “mutual funds that paid financial professionals were associated with lower returns for investors.”

In 2016, the Department of Labor issued a final rule that expanded the definition of fiduciary

investment advice. That rule was vacated in 2018.

Although the DOL issued a new Final Rule in April 2024, this is narrower in scope than the 2016 rule but has been highly contentious and is facing pushback in Congress.

The GAO’s review of how conflicts are communicated highlights that the IRS has sole enforcement authority over firms and financial professionals acting as IRA fiduciaries. The IRS says that firms typically self-report prohibited transactions – any improper use of assets held in an IRA - and pay the appropriate excise tax.

This reporting is “intended to safeguard income for retired workers by taxing transactions deemed particularly objectionable because of the potential for abuse of fiduciary responsibilities by parties having conflicts of interests,” the IRS says.

While the IRS says it will enforce any prohibited transactions reported to it by the Department of Labor, DOL does not have authority to audit IRAs for prohibited transactions and, therefore, is generally unable to refer IRA fiduciaries to IRS for excise tax enforcement.

GAO is making two recommendations to IRS, including that it develop and implement a proactive process to identify prohibited transactions between IRA fiduciaries and IRAs, and assess any associated excise tax.

IRS has agreed with these recommendations and a further update will be provided when tax officials have acted on them.