Understanding the DOL Retirement Security Rule: Essential Insights for Clients

Many Americans struggle to ask their financial advisors the right questions regarding fees and conflicts of interest. The ongoing federal debate between Regulation Best Interest (Reg BI) and the Department of Labor’s Fiduciary Rule—also known as the Retirement Security Rule—emphasizes the need for transparency and understanding.

On April 23, 2024, the U.S. Department of Labor (DOL) made significant updates to protect retirement accounts such as 401(k)s and IRAs by revising existing guidelines. These changes to the Prohibited Transaction Exemptions (PTEs) and an expanded fiduciary definition will come into effect on September 23, 2024, with a one-year transition period for certain provisions.

Key Highlights

• Stricter fiduciary standards and restrictions on excessive fees will enhance the protection of retirement assets starting September 23, 2024.
• Fiduciaries are legally required to prioritize their clients’ interests, while Regulation BI mandates broker-dealers to act in their customers’ best interests.
• High fees can drastically reduce retirement savings over time, making it essential to review and understand fee structures carefully.

The Impact of Hidden Fees

Fees such as convenience, processing, early termination, transfer, and service charges—commonly termed “junk fees”—inflate costs without adding value. These fees can significantly erode retirement account growth. For instance, 401(k) fees typically range from 0.5% to 2%, and even a 1% fee difference can lower a 401(k) balance at retirement by 28%.

Important Considerations

Under the new Retirement Security Rule, investment professionals and firms must charge only reasonable compensation and adhere to federal securities laws concerning "best execution" of transactions.

Distinguishing Best Interest from Fiduciary Duty

While Regulation BI requires broker-dealers to act in their customers’ best interest, fiduciaries bear a legal duty to prioritize clients’ interests above their own, provide prudent and loyal advice, and avoid misleading statements.

The updated rule broadens fiduciary responsibilities to include purchasing securities such as mutual funds, advising on non-securities like fixed index annuities, counsel to employers and plan fiduciaries, and one-time guidance on transactions like 401(k) rollovers.

What I Advise My Clients

Get to know your financial advisor and confirm if they are a fiduciary. Verify their credentials and firm registration through FINRA, and check for professional designations like CFA or CFP.

Carefully review your plan’s prospectus to understand 401(k) and IRA fees. The Department of Labor mandates that 401(k) providers disclose all fees in a prospectus provided upon enrollment and updated annually.

Final Thoughts

The financial landscape is evolving with advisors now required to prioritize clients’ interests above their own. The expanded fiduciary duties and elimination of junk fees have the potential to save Americans billions in retirement savings. As advisory fees decrease, advisors will need to innovate and deliver greater value to their clients.

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