Why You Need To Know About The DOL Conflict Of Interest Rule

Nearly since the Employee Retirement Security Act (ERISA) was passed in 1974 the large insurance companies, banks, brokerage firms and mutual fund companies have dominated the corporate retirement plan space with their huge marketing budgets and Super Bowl half time commercials.  What do these institutions have in common and how does that affect you?  None of them have to operate under a fiduciary standard of care when dealing with their clients.  Instead they only need to comply with a suitability or similar standard of care.  This is significant because a suitability standard does not compel them to do what is in their clients’ best interest.  As long as the recommendation is suitable, the institution is free to chose an option that profits them at the expense of their client without violating any rules or laws.  Demos, a not-for-profit, estimates that the average American two earner household will pay about $155,000 in excess retirement plan fees during their lifetime.  It’s no wonder the big names can afford the expensive glossy brochures, television and full page magazine advertisements.

On April 8, 2016 the Department of Labor (DOL) entered into the Federal Register the Conflict of Interest Rule, commonly referred to as the DOL Fiduciary Rule.  Essentially, this rule requires all providers working with ERISA plans and IRAs to act in a fiduciary capacity.  As a Registered Investment Advisory (RIA) firm, working in this arena as a fiduciary since our siblings founding in 2006, we applaud this rule … mostly.  This rule now gives the plan sponsor and the plan participants a much clearer ability to sue plan providers that are not acting in their best interests.  Remember, however, that the road to hell is paved with good intentions and this rule is a good example.  For example, even before this rule, the trustees, owners and officers of a plan sponsor were fiduciaries.  As fiduciaries to the plan participants it is their responsibility to assure that the plan is operating in the best interests of the plan participants.  Under the new DOL Fiduciary rule we feel that this opens up an easier path to litigation by plan participants against their employer by opportunistic litigators.  Just how clear this may be is the simple fact that most of the big name providers bundle their 401(k) plan platforms so that the custodian, record keeper and investment line-up are determined by the provider.  That leaves only the third party administrator (TPA) and perhaps the plan advisor as the only potential independent sources.  The reason we say potential is that often the TPA must be on the providers approved list and, in many cases, the plan advisor is an employee of the provider.  It is a relationship that is fraught with conflicts of interests and easy pickings for an enterprising attorney looking to make a nice paycheck and career.

This glaring problem is not difficult to solve but time is running out as the DOL Fiduciary Rule begins to go into effect on April 10, 2017 with full effect in 2018.  The solution is what we have provided since 2006 and that is a true open architecture plan.  Many retirement plan providers have used the term open architecture as their latest buzzword but don’t seem to understand the definition.  Open architecture does not mean that the plan provider offers more investment options than just their proprietary offerings as is often the claim.  True open architecture means that the custodian, investment advisor, record keeper/TPA are distinctly separate with no common ownership or financial arrangements that could be considered a conflict of interest.  It also means that the investment advisor has the opportunity to choose from any investment available in a ERISA plan rather than being constricted to a microcosm determined by the custodians “research team”.  It also means that the entire team is kept honest, without ability to hide fees or commissions.



Allen Bronton, AIF®, PPC™ is the managing member of Clear Financial Strategies, LLC, a Registered Investment Advisory firm.  Clear Financial Strategies, LLC was originally named Wealth Preservers, LLC in 2006 and then Clear Financial Strategies, Ltd in 2011.  Wealth Preservers, LLC remains as an insurance agency providing employee benefit services.  Clients of Clear Financial Strategies, LLC may be offered services provided by Wealth Preservers, LLC without obligation.  The writer may be contacted at (855) 972-9564

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