Fiduciary Rule- Will it Price You Out of Retirement Savings?

Since the President Obama proposed the Fiduciary Rule in February of 2015, retirement advisors have been calculation the impact on their business. Obama’s fiduciary rule is not workable, it will cost too much for many low-income Americans as currently proposed.

The Fiduciary Rule expands the definition of fiduciary under the ERISA (Employee Retirement Income Security Act of 1974) to include those professionals who work with retirement plans. This means advisors would then be raised to the standard of fiduciary. In this new definition of fiduciary, advisors must put their client’s interests above their own, and they must be transparent about the fees and commissions they receive when pointing their clients in a particular direction. The rule would hold advisors to a higher standard than they have ever been held to before. Advisors can still work on commission, but they are required to provide clients with complete transparency in cases where there is a conflict of interest. If the Fiduciary Rule is put into effect, advisors have to work to the best interest of the client because retirement brokers and insurance agents would be ethically bound to meet the standards of the fiduciary definition.

The Fiduciary Rule was created under the Obama administration in 2016. But in February 2017, President Trump attempted to delay the rule by 180 days by issuing a memorandum. This caused the DOL (Department of Labor) to reassess and analyze the rule’s potential impact. From this, in March of 2017, DOL issued their own memorandum causing a further delay.

Many companies also called for a delay to assess the impact the new Fiduciary Rule would have on their business, brokers, and agents. These sent in their comments and letters during the public comment period, almost 200,000. The overwhelming majority of which were opposed to the new rule.

What does this mean for brokers? At first look, many would think that including insurance agents and retirement brokers to act in the best interest of the client would have no downside, but this is not the case. The Fiduciary Rule would be taking money out of the consumer’s pocket. With all the financial burdens placed on the companies, life insurance and retirement costs will rise, because the brokers and agents need to be paid by someone and now that burden would be placed on the consumer.

Biased advice from advisors cost Americans more than $17 billion a year from their retirement accounts, but when the Fiduciary Rule was issued it became the most expensive rule of 2016. The rule cost more than $31 billion in total costs and an additional $2 billion in annual burdens making it the second most expensive non-EPA rule since 2005. Three major companies, Metlife, AIG, and Merrill Lynch, have already left the market due to the financial burden placed upon their companies.

Many more companies have switched to fee based accounts. This will cause consumers in low-income accounts to pay upwards of $800 per account and those already in fee based accounts to pay even more. Of more than 57 million retirement accounts, 74% are under $100,000, largely in commission based accounts. Minimum required account balances would be raised and would cost a loss of 40% of the accounts. This will do little harm to large companies and those individuals with larger incomes; the rule will negatively effect and even push out the low income consumers. “One in eight costumers will be relegated to a no advise service desk as they are too small for the risks imposed by the DOL Fiduciary Rule or too costly to be placed into an advisory account,” said Mr. Jerome Lombard, President of Private Client Group. The current rule will make Americans pay more and have decreased service and will pose a large threat for individuals with low-incomes.

There is no question that the Fiduciary Rule has had and will continue to have a major impact on the investment community. As of June 9th 2017, the Fiduciary Rule has been put into effect. In time, the full effects of the Fiduciary Rule will be transparent.