Will the New Fiduciary Rule Really Protect Your Investments?

The Department of Labor’s new fiduciary rule runs to 1,000 pages and more, and the file I’m keeping on it seems almost as hefty. At first glance, the rule seems straightforward enough: Brokers and other financial professionals who offer investors advice on retirement accounts—401(k)s, IRAs and rollover IRAs—are being required to act as fiduciaries, putting clients’ best interests ahead of their own financial gain, a stricter requirement than the current suitability standard for brokers.

But in the real world, the devil is in the details, and this rule seems particularly devilish. As Elizabeth Leary writes in her story on this topic, “financial firms are still trying to determine their responsibilities in light of the new rule.” The Investment Company Institute, the mutual fund industry’s trade group, denies the Labor Department’s assertion that assets invested with brokers underperform their benchmarks. And the ICI says that IRA investors pay about half the average annual expenses charged overall for stock mutual funds: 0.71% of assets versus 1.33%. The ICI has asked Congress to reject the rule and pass a bipartisan bill to adopt a “best interest” legal standard instead.

Although the rule doesn’t take effect until April 2017, our story can help you prepare by explaining how you might be affected and what you can do on your own to protect your retirement investments, rule or no rule. For example, Elizabeth points out that although the rule is far-reaching, it is particularly aimed at high-fee investments in rollover IRAs, such as variable annuities and nontraded real estate investment trusts. Fees aside, those investments are often risky and illiquid, and you should always approach them with caution, whether they’re inside or outside retirement accounts (see our story on variable annuities, Income Guarantees, With a Catch).

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What you should know. Assuming the rule stands, it could change the way your money is managed. Stockbrokers and money managers would have an incentive to switch from charging commissions to using asset-management accounts that levy a flat fee—say, 1% a year. That might save frequent traders money on commissions but increase costs for buy-and-hold investors. Brokers would be able to continue charging commissions, but you’d have to sign a separate contract that imposes more regulatory requirements. So you need to know which type of financial arrangement with your adviser suits you best: an annual fee, commissions or perhaps an hourly fee for a particular service, such as retirement planning.

Because of the rule’s complexity, there’s speculation that some brokers and advisers could drop small accounts or shy away from accepting 401(k) rollovers, meaning that more money would stay with employer plans, assuming employers permit it. Keeping money in your employer’s plan can give you the advantage of lower costs on larger institutional accounts, but the investment options may be poor or more limited than you’d like (see How to Withdraw From Your 401(k) Plan in Retirement).

No guarantees. And be aware of what a fiduciary standard doesn’t do: It doesn’t guarantee that the advice you get will be any better or that you won’t lose money. In the end, nobody has a bigger stake in your money than you do. That means you should understand and feel comfortable with what you’re investing in, know how much you’re being charged and match your investments with your appetite for risk. As always, we’re here to help you—and we’ll do it in less than 1,000 pages.