401(k) plans did not even exist in 1975, which is the last time the Department of Labor (DOL) issued regulations defining a fiduciary with respect to providing advice on retirement plan investments. In 2010, the DOL introduced proposed regulations that would expand the scope of fiduciary duties covered by ERISA and the prohibited transaction rules under Section 4975 of the Internal Revenue Code. Due to serious concerns and questions raised by members of Congress and the public, the DOL withdrew those regulations. Re-proposed regulations from the DOL are now under review at the Office of Management and Budget and are expected to be formally released for public comment in 2015.
The proposed rule would likely have a significant and negative impact on the ability of financial advisors to work with retirement plan participants on rollovers. Plan fiduciaries are prohibited from gaining from a transaction involving plan assets. If a terminated participant wants to roll over a plan account balance to an IRA, and there is any fee differential in the rollover IRAs relative to the 401(k) plan, the financial advisor who becomes a fiduciary under the new rule will be prohibited from working with the plan participant on the rollover. This prohibition would exist even if the 401(k) plan provider’s IRA is the most cost-effective product on the market.
This result makes no sense. 401(k) plan participants would be precluded from discussing rollover options with the current plan service provider that they trust, and be forced to find another provider on their own. The proposal, if anything, increases the likelihood that the participant will end up with a more expensive product. A disclosure regime would make more sense and create better outcomes than the proposed rule.
Investment advisors are valuable to American savers. Eighty percent of American savers feel more secure in their retirement when they get to work with the financial advisor of their choice. So it is no surprise that American savers who work with a financial advisor over 4-6 years have 58% more assets in their retirement accounts. If the re-proposed rule does not correct the flaws in the previously proposed rule, relationships with trusted advisors will be disrupted or severed, and the retirement security of American savers will be undermined.