Registered Investment Advisors have long known about the potential for conflicts of interest when commission-based providers offer 401(k) and IRA investments. The Department of Labor has been trying to implement fiduciary requirements for years and seems ready to issue final regulations soon. The courts are now getting involved also. This could be the beginning of the end for predatory 401(k) and IRA investment choices.
On April 14th, the U.S. Department of Labor released its much-anticipated proposed rules applying fiduciary requirements to those providing investment advice to IRA owners and qualified plan participants. In its news release, the DOL stated: "Under the proposals, retirement advisers will be required to put their clients' best interests before their own profits. Those who wish to receive payments from companies selling products they recommend and forms of compensation that create conflicts of interest will need to rely on one of several proposed prohibited transaction exemptions."
Although there are exceptions, the rules mean that providers cannot push for funds with commissions or 12(b)-1 fees. This is huge for investors – especially those that don’t know what is hidden beneath the surface of their investments. Also huge is that these regulations apply to rollovers of 401(k) assets to IRAs as well.
On May 17th, the Supreme Court held that 401(k) providers cannot rely on the statute of limitations to avoid legal action as long as the “inappropriate” funds are still offered and held in the plan. In Tibble v. Edison, 20,000 employees filed a class action suit claiming that it was imprudent for their plan to offer retail fund classes when less expensive products were available in the institutional class. This case is being remanded back to the Ninth Circuit, which will address the issue of offering retail vs. institutional share classes in retirement plans.
The DOL regulations are not final nor has the Ninth Circuit ruled on the Edison case yet. But, the handwriting is on the wall: Commission brokers need beware!