The fiduciary rule issued last year by the Department of Labor (DOL) and backed by the previous administration is now under review at the request of the new administration and implementation may be delayed.
Setting aside the political aspects, let’s focus instead on what is at the heart of the fiduciary rule, and the reasons why, rule or no rule, you should insist on working with a fiduciary.
The Intent of the Rule
The Department of Labor rule states that advisors who provide investment advice to individuals in employer-sponsored retirement plans (401k and the like) or individual retirement accounts (IRAs) are subject to a fiduciary standard of care.
The rule was enacted to ensure that persons advising individuals about their retirement investments would single-mindedly pursue their clients’ best interests.
Generally speaking, investors lack an understanding of the primary purpose of their retirement plans—income replacement—or how to manage their investments to accomplish that goal. The rule was designed to ensure that those who act in an advisory capacity should use their expertise to characterize various potential outcomes for meeting those income replacement needs in retirement, and how best to get there. Such a pursuit should not be derailed or colored by financial incentives to the advisor to choose one course over another, one fund over another. Consider it this way: advisors should be focused on adding to their clients’ retirement—not their own.
Rationale Behind the Rule
The spirit of the rule is important to understand—and to never forget. There is good reason why the rule was originally developed: people do not know how to prepare for retirement and they need unbiased help.
Studies show a vast majority of retirement savers are both unprepared and ill-informed. A Transamerica study cites that 70% of retirement investors do not know much about investing, and 53% are merely guessing about how much they need to save. This probably explains why 59% of people in their 50s plan on working through their retirement years, and the Bureau of Labor Statistics predicts that by 2024, 38% of 65-70 year olds will still be working. By those accounts, the retirement system has failed to accomplish its stated purpose: retirement.
The fiduciary rule may be under review, but it is alive and well at IFA—always has been and always will be. It is who we are, it is what we do, and it is what we have done every day since we started doing business 18 years ago. At Index Fund Advisors, we are your fiduciaries and your interests always come first.