The new DOL rules imposing fiduciary responsibilities for retirement plan advice might impact RIAs, even though they’ve already been held to a fiduciary standard. If you’re an RIA, these rules might require changes to how you give advice – or to how you charge.
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Here’s how the new rules can affect advisors and 401(k)s. If you’re a typical advisor, you don’t manage clients’ 401(k) accounts on an ongoing basis. At most, you might look at clients’ 401(k)s once a year and suggest updates to their allocation – and you don’t charge for this.
At some point, when the client retires or separates from service, you will likely recommend that the client roll the 401(k) balance into an IRA under your management. This results in higher AUM and increased revenue for you. Now, enter the new DOL rules. Advisors must put the interest of their clients first. So, before recommending that a client transfer a 401(k) account to a managed IRA, the advisor must show that this is the best move for the client. Therein lies the dilemma. Is the 401(k) offering so bad that it is worth moving to an IRA with a one percent management fee?
This can be problematic if the advisor has been operating under the described scenario. We all believe that our services are worth at least what we charge. Yet, can we justify our fees when the alternative is simply leaving retirement funds in the hands of the 401(k) provider?
If you’ve been managing and charging for 401(k)s, compliance with the DOL rules will be easier since your revenue will be the same whether the funds are held in a 401(k) or an IRA. This requires using a sophisticated rebalancing software (like Total Rebalance Expert) as well as account aggregation (like ByAllAccounts) to bring outside account data into your daily downloads.
To comply with the new fiduciary rules, you need to ensure that recommending a rollover from a 401(k) to an IRA is truly in the client’s best interest. And, you should document your reasons. So, how can you justify that this is in the best interest of the client? There are several potential reasons:
· The retirement funds will be professionally managed on an ongoing basis.
· The retirement investments will no longer be limited to what is offered by the 401(k) plan, meaning that the client will no longer have to hold a sub-par fund in a 401(k) merely because that is the only one offered in a particular asset class.
· The retirement account can hold investments based on optimal tax location. Thus, the retirement account can be targeted to hold more bonds (deferring taxation) while the taxable account can hold more equities (getting the benefit of capital gain rates when appreciated securities are sold).
To avoid the potential for conflicts of interest, advisors might move to retainer based fees rather than those based on AUM.
Whether you currently manage and charge for 401(k) investments - or collect retainer fees, you shouldn’t assume that the new DOL rules won’t impact you. You will need to justify and document your recommendations related to retirement accounts. If you don’t currently charge for 401(k) advice and you collect AUM fees, you might need to consider changing your ways.