There has been a notable amount of discourse concerning the “new” Department of Labor (DOL) rules regarding retirement plans, and specifically Individual Retirement Accounts (IRA), in the financial news over the last several months.
Most of that news has centered around how the service providers, that is third party administrators (TPA) for retirement and 401(k) plans, insurance companies, banks and brokerage houses, will react to mandated changes. How will compliance issues be handled? How will costs of compliance be allocated? How will business be affected? Certainly the rules will have significant effect on the institutional side of the financial industry and how business will be done moving forward, but how about the end user or retail owner of retirement and investment accounts? What changes can they expect? What might be the impact to consumers and retail owners of IRA and 401(k) accounts?
The 1974 Employee Retirement Income Security Act (ERISA) established regulations regarding pension and profit sharing plans at a time when those were the primary sources for retirement savings for most people. Although the ERISA rules allowed for the creation of Individual Retirement Accounts (IRA), the DOL did not exert any oversight on individual plans, only corporate sponsored or institutional plans. That is the way things were for the next forty years.
As pension and profit sharing plans began to disappear from the landscape and 401(k) participation became a primary source of retirement savings, a concern began to grow that fees, expenses and lack of transparency were working to the detriment of the individual participants. The result was a DOL ruling which mandated new guidelines for providers of services in the retirement savings industry.
These changes will result in bringing people’s Individual Retirement Accounts (IRAs) under the auspices of the DOL, who already was the overseer of qualified plans such as pensions, profit sharing and 401(k)s. There was, and continues to be, resistance regarding implementation by the service providers, because of the increased costs of administration and compliance. As is the case much of the time when a service provider has increased costs there is a propensity to pass those increases on the end user, or retail consumer.
This most certainly will have IRA owners seeing changes to their account administration, some of those changes may in fact be rather advantageous, which will be good for consumers. One thing is certain, the purchase and use of mutual funds will be forever different from how it has been in the past. New share classes and pricing will be the course of action going forward. However, merely reducing fund expenses is only one of the changes that can be expected. There will be an increase in paperwork for individuals who open an IRA and an increase in disclosures to assist the retail consumer to make informed decisions. Some of the same transparencies will apply to 401(k) plans as well.
Like any change in rules there may be a number of unintended consequences. The purpose of the new rules was to help the smaller investor, but the complexity and paperwork required to the financial industry as part of the implementation, may result in leaving those with the most need of assistance having less assistance available. Face-to-face or person-to person contact and relationships are vital to the ability of many investors to make informed decisions. What happens when the value of your account falls below a threshold established by your service provider and you are directed to a call center for assistance with your questions or concerns? To whom will you turn for help that you may need at the most critical of times? A key component of the DOL rules is to assure IRA owners of fiduciary treatment similar to what institutional plans have long since expected.
A fiduciary places the interest of the client above all else. Make sure to ask your provider if they are acting as a fiduciary in your best interest and if they are not, they need to have a good explanation as to why not. You may be asked to sign a form waiving this fiduciary relationship, depending on the services or products being provided. This is not necessarily bad, but make sure that you are completely clear on the reasons why, before you sign.
If you’d like more clarification or a second opinion as it relates to these issues, feel free to give us a call.