As a registered investment advisor and an ERISA 3(38) fiduciary, the ForUsAll team is a big fan of the Department of Labor’s fiduciary rule aimed at stopping advisers from putting their own interests before employees in 401(k) plans.

From the Department of Labor’s calculations, the new rule is tackling the $17 billion a year every day investors pay in exorbitant fees, that line the pockets of some of the country’s largest 401(k) service providers.

So now that the DOL has put a stake in the ground on what they consider fees that create conflicts of interest, what will change after the ruling goes into effect on April 10, 2017?

Investment Products: Before and After the Department of Labor Fiduciary Rule

# Before DOL Fiduciary Rule # After DOL Fiduciary Rule
401(k) advisors — particularly those who were not registered investment advisors — were allowed to recommend investment products and funds that were not in the best interest of their clients (including employees in 401(k) plans).  Fee structures that DO NOT put the clients’ interests first are [no longer allowed after the DOL Fiduciary Rule](, including:- Commissions - 12b-1 fees - Variable and indexed annuities in qualified accounts - Quotas, bonuses, or contests that would inappropriately incentivize advisors

Investment News reports that:

Independent broker-dealers, who currently operate under a less stringent standard that only requires that investment advice be “suitable,” face the greatest disruption. They’ll need to craft new administrative steps and invest millions in technology and training to meet the rule’s requirements. Many advisers will face changes in how they are paid.

Fiduciary Responsibility: Before and After the Department of Labor Fiduciary Rule

# Before DOL Fiduciary Rule # After DOL Fiduciary Rule
401(k) advisors who are independent broker-dealers (typically advisors moving products for large brokerage houses like John Hancock, MassMutual, American Funds) generally did not need to take on a fiduciary role.Registered investment advisors did need to meet an ERISA fiduciary standard. All 401(k) advisors will now take on fiduciary responsibility and liability — meaning all 401(k) advisors are now mandated to act in the best interest of their clients.

It will be the independent broker-dealers who depended heavily on generating commissions that will need to substantially change their business to comply with the Department of Labor Fiduciary Rule. And it will be these same advisors that will be finally shouldering the liability for their investment recommendations to employees in 401(k) plans.

How Fees are Charged: Before and After the Department of Labor Fiduciary Rule

# Before DOL Fiduciary Rule # After DOL Fiduciary Rule
Asset-based fees and fees that would change based on what fund an employee would put into their 401(k) plans were allowed. This created a playing field where advisors pushed funds with commissions over non-commission funds, for their own benefit. It also created a conflicted system in the overall brokerage firm, creating contest and quotas that would push agents to sell more and more commission-driven funds.The further elimination of variable asset based fees and other incentives for advisors to give investment advice that didn’t act in the best interest of employees.
A secondary effect of the fiduciary rule and removing commissions from the 401(k) game is advisers will let go of smaller clients (likely companies with less than $10 million in the 401(k) plan).  The fiduciary rule changes the ROI of each company a 401(k) adviser keeps on his or her platform, and advisers will need to assess whether they want to keep serving smaller clients that will ultimately make them less money than before.

It almost goes without saying that this won’t be the case for 401(k) advisers that are already level-fee fiduciaries. ForUsAll 401(k) advisors have always provided ERISA 3(21) and 3(38) fiduciary services and our fee structure is built upon the principle that an investment adviser should always act in the best interest of their clients.