The New Retirement Account Fiduciary Standard
The Department of Labor issued new rules that will require financial advisers handling 401(k)s and individual retirement accounts to act in the best interest of their clients. Previously brokers were only required to recommend suitable investments, and some firms steered clients into investment products with unnecessarily high costs. The White House estimates that these conflicts of interest cost retirement savers $17 billion a year. Here's how the new retirement account rules will affect your investments.
[Read: How the Budget Deal Changes Social Security.]
Advice in your best interest. An advisor who makes investment recommendations to 401(k) plan participants, 401(k) plan sponsors or IRA owners in exchange for compensation will now be considered a fiduciary. Fiduciaries are legally required to recommend investments that are in the client's best interest, not their own. An advisor who manages tax-preferred retirement accounts must now select investments that are best for the participant's situation, not the funds that make the biggest profit for the advisor.
New IRA customers will be required to sign an enforceable contract beginning in January 2018 in which the financial firm commits to acting as a fiduciary, providing advice in the consumer's best interest, charging a reasonable compensation and promising not to make misleading statements about conflicts of interest. Existing IRA owners might receive a notice outlining the new practices, but will not need to take action. Workers participating in employer-sponsored 401(k) plans will receive the same protections and disclosures, but will not need to sign a contract.
The rules apply only to retirement accounts. The new fiduciary standard only applies to tax-advantaged retirement accounts such as 401(k)s and IRAs. Financial advisers who manage other types of investments may not be held to the same standard. For your taxable investment accounts, you will still need to ask potential investment advisors if they are willing to act as a fiduciary and make sure that you are not receiving biased investment advice.
[Read: A Guide to Getting a Pension.]
Reasonable compensation. There are several exemptions to the fiduciary standard. Commissions, revenue sharing arrangements and 12b-1 fees will still be allowed if the firm and advisor commit to charging reasonable compensation, providing advice in the client's best interest and disclose conflicts of interest. The law prohibits financial firms from giving financial incentives to advisors who recommend inappropriate investments to clients in order to help that company's bottom line. Financial firms must also direct customers to a website that explains how they make money. Clients can request more detailed disclosures about the costs and fees charged.
Existing investments grandfathered. Previously acquired assets will continue to be subject to the old rules, and advisers will be allowed to recommend that clients continue to hold those investments or follow previously set up purchase agreements. However, any new advice will be required to be in the best interest of the client and only charge a reasonable amount of compensation.
[Read: How to Avoid 401(k) Fees and Penalties.]
The rule doesn't take effect until 2017. The new fiduciary standard for retirement accounts will take effect in April 2017 at the earliest, but some provisions don't become active until January 2018.
