I see the Department of Labor’s fiduciary proposals affecting registered investment advisors in a number of ways that would make it difficult for them to work with 401(k) plan participants who have retired or changed employment and may want to roll over assets from a 401(k) plan to an individual retirement account, or in situations to help a client make changes to their IRA investments.

If an RIA gets paid for recommending a rollover of a client’s 401(k) investments into an IRA or recommends an investment that’s proprietary to their company or an affiliate of their company, those would be considered prohibited transactions. If the RIA is involved in making “prohibited” transactions, they will have to comply with the DOL’s proposed “best interest contract exemption” (BICE). Complying with these BICE contracts would be quite expensive and difficult to manage.

The BICE contracts require the advisor:

  • acknowledge their fiduciary status
  • agree to provide advice under the best interest standard
  • agree to receive no more than reasonable compensation in relation to the services provided to the retirement investor
  • agree that the disclosures will not be misleading
  • agree the contract contains various other “warranties”

In addition, the contract would have to be provided to the client with these disclosures, not to mention, the independent RIA would be required to maintain a website with the detailed financial information. A Notice of Intent to use the BICE exemption must be filed annually with the DOL.
I see the intent of the DOL here as trying to provide full disclosure to investment clients and assure conflicts of interest are disclosed. Many RIAs would no longer be able to work cost-effectively with their clients.


Although these proposals may have a good intent of disclosure in them and try to avoid conflicts of interest, there are already rules and regulations at the DOL on conflict of interest disclosures. I believe there are other much larger and offensive “holes” in the current disclosure that are more deceptive and allow more conflict of interest. For example, mutual funds are not required to disclose internal commission expenses. These commission costs annually average expense ratios in a managed equity based mutual fund of 1.25%.

Also see: "DOL fiduciary opponents pin price on proposal: $3.9B"

According to John Bogle in his book, Bogle on Mutual Funds, there is a 1-1.5% annual cost of commissions that are internal to mutual funds and are not required to be disclosed to investors. Mutual funds are required to disclose the expense ratios of 1.25%, yet clients have no idea they are paying an additional 1-1.5% in commission cost annually on top of that 1.25% expense ratio. When you’re disclosing only half of the costs of an investment, there is an outrageous lack of disclosure of very material information. The wide use of group annuities in 401(k) plans is another example that’s more egregious in terms of non-disclosure of fees and conflict of interest.

Most fees in group annuities are within the mutual funds offered by the group annuity as investment choices to the 401(k) participants. These mutual funds have substantially higher overall costs compared with typical mutual funds. Those fees are used to cover the cost of the 401(k) in general, as well as the investment cost, the cost of the mutual fund, and the mutual fund’s commissions.

It’s difficult for plan sponsors and/or plan participants to determine the fees in group annuities because of legal exemptions and the fact that group annuities are regulated by state insurance commissioners. However, there is research showing these group annuities can have fees paid by the participants in excess of 4% annually. Not disclosing material expenses like these to plan participants or investors in mutual funds conceals substantially higher fees and costs that are more widely used than the relatively narrow and low cost associated with some of the DOL’s proposed “prohibited transactions.”

Sumnicht, MBA and CFP, is founder and CEO of iSectors, an outsourced investment manager that provides advisors access to their proprietary asset allocation models based on low-cost, index ETFs designed with various risk tolerances.

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