President Trump’s decision to delay the implantation of President Obama’s fiduciary rule, which was in the works for almost six years, put’s a pause on a framework that would have regulated the investment advice given to 401(k) plans and IRAs equally.
Obama’s fiduciary rule aimed to protect retirement savers from bad advice and keep more money in their pockets. It also sought to indirectly change the way the industry structures its products and advisor compensation policies. Under Obama’s fiduciary rule, virtually all retail selling and advisory activity involving participants in 401(k) plans, other employer-sponsored retirement plans subject to ERISA, and IRAs would give rise to fiduciary status.
In the case of a 401(k) plan, investment advice given to plan participants is generally provided by registered investment advisors (“RIAs”), which are already held to a fiduciary standard. RIAs have a fiduciary duty to their clients that requires them to put their clients’ interests ahead of their own. In addition, Obama’s fiduciary rule would have extended the fiduciary standard to a broad level of advice concerning IRA rollovers or distributions, which have become a popular cross selling opportunity for advisors who could potentially earn a higher level of compensation providing rollover IRA services than the level of plan-related compensation that would otherwise be earned by the advisor if the participant’s assets had remained with the plan. Whereas, investment advice provided to IRA holders is often delivered by broker-dealers and not RIAs. Broker-dealers that work with the public typically become members of the self-regulatory Financial Industry Regulatory Authority, or FINRA. Broker-dealers owe a duty of fair dealing with their clients, which are generally seen as being less onerous than the fiduciary duties that RIAs owe their clients.
Hence, President Trump’s decision to delay the implantation of Obama’s fiduciary rule could prove more costly for IRA holders than 401(k) plan participants. With the value of IRA assets close to $7.3 trillion as of 2015, making up the greatest share of retirement assets, coupled with the popularity of IRA rollovers from 401(k) plans, the decision to delay the implementation of the fiduciary standard could benefit 401(k) plan participants as well as cause them to reevaluate the benefit of an IRA rollovers as the advice 401(k) plan participants receive will typically be held to a higher fiduciary standard than IRA holders, many of whom receive advice from broker-dealers, whom only owe a duty of fair dealing.