The DOL Retirement Security Rule: What My Clients Need to Know

Few Americans know how to ask their financial advisors the right questions about fees and conflicts of interest. The federal debate between Regulation Best Interest (Reg BI) and the DOL Fiduciary Rule (also called the Retirement Security Rule) highlights the need for clarity.  

On April 23, 2024, the U.S. Department of Labor (DOL) took a major step to protect the retirement accounts of Americans like 401(k)s and IRA by updating these existing guidelines. The additions and changes to the Prohibited Transaction Exemptions (PTEs) and the updated fiduciary definition take effect on September 23, 2024. There is a one-year transition period after the effective date for certain conditions in the PTEs.

Key Takeaways

• Enhanced fiduciary standards and limits on junk fees will better protect retirement accounts. The new rules will be effective September 23, 2024.
• Fiduciaries are legally obligated to prioritize clients’ interests, while Regulation BI requires broker-dealers to act in their customers’ best interest.
• Excessive fees can significantly reduce retirement savings over time; reviewing and understanding fee structures is crucial.

The Impact of Hidden Fees

Convenience, processing, early termination, transfer, and service fees are “junk fees” that affect all aspects of the economy. Junk fees are defined as fees that increase the price and add no services or value to the product. They can impact retirement account returns significantly over time. The range for 401K fees is between 0.5 and 2%. For example, a 1% difference in fees can reduce a 401(k) balance at retirement by 28%.

Important

Under the new Retirement Security Rule, the investment professional and firm must charge no more than reasonable compensation and comply with applicable federal securities laws regarding “best execution.”

The Difference Between Best Interest and Fiduciary

Regulation BI requires broker-dealers to act in their customers’ best interest, but fiduciaries are legally obligated to prioritize their clients’ interests, provide prudent and loyal advice, and avoid misleading statements.

The new rule will expand the fiduciary responsibilities to cover purchasing securities like mutual funds, new types of non-securities like fixed index annuities, advice to employers and plan fiduciaries, and one-time advice for transactions like 401(k) rollovers.

What I’m Telling My Clients 

Get to know your financial advisor and ask if they are a fiduciary. Research your advisor and the firm via Finra to see if they hold a Series 65 or have professional designations like CFA or CFP. 

Review your prospectus and see how much your 401k and IRA account cost. The U.S. Department of Labor requires 401(k) providers to disclose all fees in a prospectus you receive when you enroll in a plan, and It must be updated annually.

The Bottom Line

A great time has arrived when financial advisors are required to put the client’s interest ahead of their own. Under the new rule, fiduciary responsibility continues to expand, and removing junk fees could save Americans billions in retirement savings. The continuous cut in advisory fees will require advisors to find new ways to add value to clients.

Read the original article on Investopedia.