by Craig D. Price, Certified Financial Planner® – Stuart, Florida and Robert J. Zike, CEBS®, CWPP®
FOR BUSINESS OWNERS AND RETIREMENT PLAN TRUSTEES
The White House Council of Economic Advisers estimates that investors pay $17 billion a year in excessive fees. As a result, the Department of Labor (DOL) recently enacted a fiduciary rule that requires advisors stop putting their own interests in earning high commissions and fees above their clients’ interests in obtaining solid investments at the lowest prices. Congresswoman Tammy Duckworth of Illinois, in a New York Times Op Ed, wrote “If the fiduciary standard is good enough for medical care, legal advice and accounting, it is good enough for financial retirement advice. We don’t accept less anywhere else in commerce.”(2) We wholeheartedly agree.
For business owners with a company retirement plan, the new fiduciary rule raises risks and creates opportunities. The DOL fought for the fiduciary rule, and the agency will be responsible for enforcing it. Beginning in 2017, DOL auditors will verify company retirement plans comply with the fiduciary rule. Plans which fail to adopt the rule’s tougher requirements can face substantial fines and penalties. In 2015, before the 1,000 page rule was enacted, the DOL fined American businesses $696.3 million for various retirement plan violations.(3) Under the new rule, business owners may see increased risk of potential retirement plan lawsuits. For some employers, lawsuits are happening already. Recently, the New York Times reported that employees of Yale, M.I.T., and N.Y.U. filed suit alleging their retirement plans overseers failed to properly monitor and replace “expensive, poor-performing investment options.” (4)
What Are the Opportunities?
Despite heightened risks, there is significant benefit to the new fiduciary rule: lower investment fees that will most likely result in larger retirement nest eggs. The former advice standard did not require financial advisors to recommend the ‘best’ investments or the ‘best’ fee structure for a retirement plan, but the fiduciary rule requires them to. How will the rule accomplish this?
‘Fee-Leveling’ versus Commissions?
The fiduciary rule makes it harder – though not impossible – for advisors to use high-fee products by sharply reducing variable, commission-based compensation. The new rule prefers retirement plan advisors charge a flat advisory fee. This alternate compensation method is known as ‘fee-leveling.’ The DOL expects level fees to save Americans billions of dollars. In practical terms, the fiduciary rule means retirement plan trustees should now engage financial advisors who charge a level fee for their services.
Financial Services Industry Resistance, and the ‘BICE contract’
Before the rule was enacted, a unified coalition of financial service firms lobbied hard to weaken the fiduciary rule. They partially succeeded by creating an exemption that would allow a retirement plan’s trustees – usually the business owners or senior management — to opt out of the fiduciary rule and its preference for level-fee advisor compensation. The exemption is called the Best Interest Contract Exception, or BICE for short. Simply stated, the BICE is a contract which attests that it is in the best interest of the company employees to request an exception from the fiduciary rule standard.
The BICE loophole allows banks, insurance companies, brokerage firms and their advisors to maintain the high-fee, commission compensation system they currently enjoy – at the expense of their clients’ savings. Through a BICE agreement, the retirement plan provider and the advisor fully disclose their compensation arrangements, no matter what fee level is charged. A BICE also discloses any other conflicts of interest. Then, acknowledging these disclosures, the 401(k) plan’s trustees sign the BICE and relinquish their best interests. For those responsible for company retirement plans, there is a risk that the use of a BICE agreement could invite scrutiny of retirement plan fees and advisor compensation.
What Is Best for You and Your Employees?
Smart business owners are wise to explore alternative retirement plan providers. In many cases, a BICE is simply a way for your current financial advisor to maintain the very profitable status quo — usually at the expense of company employees. At our firm, we generally do not believe BICE agreements will be in the best interest of business owners, plan trustees, or their employees.
How Do You Win as a Business Owner?
First, you win by not running afoul of the new rule. Besides high fees, an area of particular concern for 401k plan trustees is self-directed brokerage accounts offered within some plans. Employees who select their own 401k investments in a separate brokerage account pay variable fees or commissions. The fees paid within self-directed brokerage accounts can be very different from the fees paid by the rest of the 401k plan participants. This is a risk under the new rule. To reduce risk caused by the variable fee structures of self-directed brokerage accounts, plan trustees will likely have to decide among three options:
- Eliminate self-directed brokerage accounts altogether
- Require all self-directed brokerage accounts be consolidated to one investment provider with level-fees
- Require a BICE agreement from every employee who has a self-directed brokerage account.
Business owners can also win under the fiduciary rule by driving down plan fees. The DOL expects competition among plan providers and rigorous DOL enforcement to knock down fees and save Americans billions of dollars. Since business owners frequently have their firm’s largest 401(k) plan balances, the fee reductions should benefit them the most.
What Should You Do Now?
First, protect yourself from potentially costly mistakes by becoming familiar with the fiduciary rule. Second, work with advisors and third party administrators who understand the fiduciary rule and who offer competitive, level fees. Doing nothing may be the least desirable option because you may risk being criticized for not acting in your employees’ best interests. This could lead to legal liability.
At Price Wealth Management, we are fiduciaries for retirement plans and IRAs. We assist 401(k) plan trustees as level fee advisors. Our services include expense analysis, investment monitoring, risk management, investment policy statements, and plan due diligence. Collaborating with independent record-keepers and third party administrators, we arrange for compliance testing, on-site employee education, and access to web-based planning tools. Our advice is product neutral, conflict-free, and compliant with the new fiduciary rule. As board-certified financial professionals, we embrace the role of fiduciary for retirement plan and IRA clients. For a free consultation or cost analysis of your particular retirement plan or IRA, contact us directly at 772-888-3735.
Price Wealth Management, LLC is a privately-owned Registered Investment Advisor affiliate. As the owner, Craig Price understands the risks and rewards of owning a business, having employees, and offering a company retirement plan.
Robert Zike is President and founder of Employee Benefit Consultants of Florida, Inc. The firm is an expert third party retirement plan administrator (TPA) whose practice specializes in DOL compliance and plan administration.
2. Duckworth, Tammy “Isn’t Honesty the Best Policy.” New York Times 10 Jun. 2016
4. Bernard, Tara S. “M.I.T., N.Y.U. and Yale Are Sued Over Retirement Plan Fees.” New York Times 9 Aug. 2016