Kevin Michels, CFP®, EA
Earlier this month the Department of Labor approved the new “Fiduciary Rule” that has been in the works for the better part of the last decade. The rule requires:
A financial advisor must act in the best interest of his client when rendering investment advice on the client’s 401(k), IRA, or any other qualified retirement plan.
This is huge, especially for small business owners that sponsor a 401(k) or other qualified plan for their employees. Here’s why:
There is a good chance participants in your 401(k) plan (yourself included) are getting raked over the coals when it comes to fees in your 401(k) plan.
Before this rule was passed, advisors to 401(k) plans were held only to what is known as the “Suitability Standard”. Meaning, they could recommend any mutual fund in your 401(k) plan as long as it was “suitable” for participant’s situation and risk tolerance.
This has resulted in some advisors recommending funds that charge commissions and are high in fees without taking into account what is best for the participants of the plan.
With the passing of this new rule, advisors will now be held to the “Fiduciary Standard.” Meaning, they must act in the best interest of their clients at all times.
Hopefully this translates to advisors recommending quality funds to the 401(k) plan that are low in costs and have a track record of solid performance.
In light of the passing of this new rule, we highly recommend you ask your advisor the following two questions:
- How are you compensated?
If you receive a dodgy answer like, “it’s complicated”, your advisor is most likely receiving a commission each time participants invest money into their 401(k). Buying expensive funds with hidden fees built-in to compensate the advisor can kill the participant’s rate-of-return over the long haul.
The answer you want to hear is, “fee-only”. This means your advisor is paid a fee on either an annual, quarterly, or monthly basis paid directly from your company or from the participants of the plan. This type of compensation encourages the advisor to “earn his keep” and eliminates the conflict-of-interest when recommending certain funds to the 401(k) plan.
- Are you a Fiduciary?
If you don’t receive a definite “yes” then your advisor is very likely not a Fiduciary. A Fiduciary is required to act in the best interest of his clients at all times.
A solid 401(k) plan includes an advisor who recommends low-cost quality funds to the participants, provides top-level service and is always accessible to participants of the plan.
With the passing of the Fiduciary Rule, now is a great time to re-evaluate your plan and make sure your employees (and yourself) are positioned to maximize the benefits of your 401(k) plan.