Believe it or not, this question is at the heart of a hotly debated new rule proposed by the Department of Labor (DOL) surrounding the investment alternatives and advice provided to retirement plan sponsors and participants. Simply put, many brokers who provide this advice can offer a number of alternatives to ERISA based plans and their participants. As long as the recommendation can be deemed a “suitable” one based on the investor’s objectives, the broker is free to recommend those that make him/her the most money instead of what is in the best interest of the client. It is easy to make the connection that the more money paid to the broker for selling an investment, generally, the worse the outcome for the investor. This dynamic represents an inherent conflict of interest. The broker is faced with the choice of generating enough commission to feed his family or provide the best advice to the client. Now, let’s add another dynamic. Assume that the company employing the broker demands a certain level of commission income from its representatives in exchange for their continued employment and those with the highest levels of commission will be rewarded by the company with higher pay and other perks. Now, the broker is faced with a slightly different choice, one of generating enough commission income to feed his family and buy that new Ferrari or lose his job. Since the commissioned based approach generally used by most providers of retirement plan services is one that is driven by this conflict of interest, the DOL proposed a new rule designed to elicit better advice for the participants and sponsors of qualified retirement plans. While it is 120 pages in length, the rule as I read it boils down to holding those providing this advice to a fiduciary standard. The fiduciary standard is a significantly higher one than the standard of suitability mentioned above. A fiduciary is required to place the client’s interests ahead of their own when making investment recommendations. Violating that standard potentially exposes the individual and/or his employer to legal remedy that may include the personal assets of the advice provider(s). Not surprisingly, many on Wall Street find this an unacceptable change to the status quo.
Let’s imagine life if this proposed new rule goes into effect: The broker would make the same amount of money regardless of what investment the investor decides on. Now, maybe the participant who leaves a retirement plan will be offered the choice to invest in an index fund with expenses of about .1% instead of an annuity product that charges up-front fees of about 7%, annual fees of about 1.5% and liquidity constraints that last for seven or eight years or longer. Recommendations such as the annuity just mentioned have been common place and would likely meet the suitability standard. It is not the recommendation that an adviser held to a fiduciary standard is likely to make. Further, imagine that your company sponsors a retirement plan for its employees. Instead of being offered a plan with R1 shares that may have expenses of about 1.8% annually or more, your participants would enjoy access to a plan with expenses of about 1% or possibly much less, saving many thousands of dollars for them to spend in retirement instead of paying for the broker’s new Ferrari. What is even better, instead of the broker being paid by the mutual fund company whose shares are being offered in the plan, the broker could be paid directly by the client a mutually agreed upon fee, changing the dynamic of who the broker is working for.
Of course, there are advisers who already work this way. Most of them are Registered Investment Advisory (RIA) businesses, not broker dealers or insurance companies. Finding one may allow your plan to experience better service, better returns, lower fiduciary liability and lower fees. One company that has been providing this service to its retirement plan clients for years is Potomac Wealth Management LLC, based in Great Falls, VA. If you would like to discuss how this approach to retirement plans might help you provide a better retirement for yourself and your employees, you can reach them at (202) 236 9667. Initial consultations are free.