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Delay of DOL Rule Victory for High Cost Non-Fiduciary 401k Advisors

Non-Fiduciary 401k AdvisorsA study by a regional record keeping TPA that works exclusively with fiduciary plan advisors shows that fees charged by these higher level advisors may actually be lower than the industry norm. Meaning some plan sponsors are paying more for advisors providing potentially conflicted advice – Obama’s Council of Economic Advisers had estimated the cost to be $17 billion annually.

What’s conflicted non-fiduciary advice look like in DC plans and how can it affect plan sponsors and their employees?

The 2017 TPSU/NAPA Plan Sponsor Survey shows that 63% of plan’s advisor act as a fiduciary with 20% not sure. A fiduciary advisor’s compensation cannot vary meaning no matter the investment recommended, the advisor gets paid the same – fees must also be reasonable. They also have personal incentives to limit fiduciary exposure and liability.

Non-fiduciary advisors are paid through commissions imbedded within the investment or expense ratio (usually 12b1 fees) which can vary by fund or share class providing potential incentives for advisors to recommend investments that pay them or their firm more. Their standard is suitability only.

So along with conflicts, commissioned based advisors may not be able to use certain low cost non-commissioned share classes which also do not have revenue sharing, a form of variable commissions paid to record keepers and other providers through the investments, usually in the form of SubTA (Sub Transfer Agency) fees.

The biggest impact of the DOL conflict of interest rule will be on IRAs as two-thirds of 401k and 403b plans are already using a fiduciary advisor with many broker dealers forcing non-fiduciary advisors to partner with fiduciary advisors in their firm or use a third party fiduciary. But almost half of plans with less than $5 million are still using a non-fiduciary advisor causing potential harm to employees and costing more.

According to the regional record keeping TPA:

Hiring a financial advisor that’s not obligated to give fiduciary-grade investment advice can be a costly mistake for 401(k) plan sponsors. When they follow conflicted investment advice, and participants pay too much for plan investments, fiduciary liability can result. More plan sponsors than ever are not taking this risk – they’re hiring fiduciary-grade advisors instead. I don’t see this tide turning even if the Fiduciary rule is overturned. The best news about this trend? Fiduciary-grade advice often costs less.

Fred Barstein

Fred Barstein

Founder & Editor-in-Chief at 401kTV | TRAU | TPSU
Fred Barstein is the Founder & Editor-in-Chief of 401kTV. Fred is also the Founder and CEO of The Retirement Advisor University (TRAU), a collaboration with UCLA Anderson School of Management Executive Education and The Plan Sponsor University (TPSU).Mr. Barstein was also Founder and Editor-in-Chief of NAPA Net.
Fred Barstein
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