As of the date of this blog post it’s unclear if the Department of Labor’s fiduciary rule will go into effect. The rule is designed to raise the standards of investment advice in retirement accounts. Simply put, the fiduciary rule requires the advisor to act in the best interest of their clients. Here is where you, the client, are likely to say, “Well duh!”

Yet, the rule was perceived as necessary to prevent some advisors from putting their interest in fees above their interest in you and your employees. For example, an advisor might include specific mutual funds on their 401(k) platform simply because they benefit from upfront sales charges or recurring 12-b1 fees. Such funds might be “suitable” for meeting the retirement goals of your employees, but they might not be in their “best interest” given the high fee structure. We have previously written about how you can understand if you’ve hired a broker or an advisor; read more here.

There has been a lot of news about the fiduciary rule over the past several months, and plan sponsors are likely now much better informed about the fees associated with their 401(k). In the meantime, retirement plan advisors are busily preparing for the new law, particularly the big broker-dealers who have historically been held only to the “suitability” standard. The law should be less of a hassle, and less of a cultural shift, for registered investment advisors (RIAs). They have long been held to a “best interest” standard, and many take pride in offering independent advice.

But even when the fiduciary rule comes into effect, it’s best not to assume that your advisor (or potential advisor) is offering a truly low-fee arrangement.

Here are three things to watch out for if the fiduciary rule becomes law:

  1. Are the fees still high, but merely disclosed? Despite all the anguish expressed from the broker-dealer community regarding compliance hassles and costs associated with the new rule, plan sponsors will have to remain alert for high cost plans. For example, it will still be possible for an advisor’s compensation to include revenue sharing and 12b-1 fees as long as appropriate disclosures are provided. (Read about the BIC exemption here.) The 401(k) industry is evolving, and old school compensation schemes like those with 12b-1 fees are becoming less common. Think twice about signing on with an advisor who still operates under this business model.
  2. Are revenue sharing fees showing up in other places? The practice of revenue sharing (where mutual fund fees paid out of fund assets pay for other services) is actually on the decline. A new class of mutual fund shares called “zero revenue sharing” is gaining ground. In other words, the fund fee only pays for the cost of the fund’s management. (It’s okay to say “Duh!” again.) But that’s not the end of the story. The expenses once covered by those fees are likely to be billed to the plan as separate items. Bottom, line, be relentless when ascertaining information on the total cost of your retirement plan.
  3. Regardless of share class, are the fund fees still high? Even without 12b-1 fees and no conflicts of interest between the fund company and the advisor, some funds are just plain expensive. Be sure to know the average expense ratio of the funds provided on the platform, including average expense ratio by asset class.

What if the fiduciary rule is delayed indefinitely?

Well, that could happen. But you can know if the advisor is acting in your best interest by asking the right questions. For example, does the investment platform primarily consist of the advisors own mutual funds? (Red flag.) What is the average expense ratio on the funds that are offered? (Should be well below 0.70%) How does a comparison of all the fees compare to the industry average? Are target date funds included?