Whatever you were doing in 1975, we can agree you were much younger then (presuming you were even alive). The DoL first defined the term “investment advice fiduciary” nearly 50 years ago, a time when most people thought IRA meant Irish Republican Army, and the 401(k) plan did not yet exist. Two generations later, they seem to have gotten it right.
The rule is good news. The DoL will require that registered investment advisors to qualified retirement accounts, such as Traditional and Roth IRAs and 401(k) plans, provide “prudent, loyal, honest advice free from overcharges” to clients. You may be thinking, “Wait! Weren’t they already required to do that?”
The answer to your question is “no”. The current ERISA rules do not provide adequate protection, according to Lisa Gomez, assistant secretary of the Employee Benefits Security Administration, the organization that enforces ERISA law. During a call with reporters last week, she said that no obligation exists to act in a retiree’s best interest in many circumstances and that advice could come with significant conflicts of interest.
ERISA is the acronym for the Employee Retirement Income Security Act, enacted in 1974. The new rule follows a long history of changes to the Act. ERISA covers only certain retirement accounts (known as “qualified”) and employee health plans.
Expert advice can be critically important for retirees on a wide range of topics, from “Should I do a Roth conversion?” to “Is a 72T distribution right for me?” to basic questions of asset allocation and risk exposure. The new rule is intended to protect retirees from advice that may benefit the advisor more than his or her client.
Insurance companies, broker-dealers, and banks all produce products for qualified retirement plans. These organizations have different regulators, and the products they offer can vary widely in their costs, performance, and transparency. It can be confusing for many people, who may end up simply trusting a salesperson in the mistaken belief that they are obligated to put their client’s interests above their own.
The “prudent person rule” has governed investment advisors and trustees for almost 200 years and remains a sound legal principle. Written in 1830 by Justice Samuel Putnam of Massachusetts, the rule instructs trustees to “observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.”
The new DoL ruling adds “loyal, honest advice free from overcharges” to the overarching concept of prudence. This does set the bar high, but retirees should take the time to understand what their options are and only act when they have a clear understanding of why a given recommendation is their best option.
Investors and retirees should also remember the benefits of this rule for their investments in non-ERISA accounts and assets. Whether your money is in a taxable securities account, a banking product, or an insurance contract, it’s a wise approach to demand the new DoL standard in all your financial dealings.
