Despite its claims to be for “all Americans,” the Trump Administration is moving fast to repeal the
historic pro-investor fiduciary ruling that let’s 401(k) investors know the fees, expenses and conflicts-of-interest their financial advisor and 401(k) providers are receiving when selling them mutual funds and annuities for their retirement accounts.
The anti-individual investor groups sponsoring this anti-fiduciary lawsuit in the pro-financial industry West Texas courts are the U.S. Chamber of Commerce (representing U.S. global banks and investment firms), the Financial Services Institute, the Financial Services Roundtable, the Greater Irving-Las Colinas’ Chamber of Commerce, the Insured Retirement Institute, the Lake Houston Area Chamber of Commerce, the Lubbock Chamber of Commerce, the Securities Industry and Financial Markets Association, and the Texas Association of Business.
All of these huge lobbying groups, and more, work daily against the interests of individual investors.
The lawsuit names Department of Labor Secretary Thomas E. Perez and the U.S. Department of Labor and asks for an injunction against the rule. Enforcement of many of its provisions has been pushed to 2017, but some will go into effect this year.
But experts in the far-reaching DOL fiduciary regulation are skeptical the lawsuit will have its desired effect. According to Ary Rosenblum of The Rosenblum Law Firm PC, “I’ll believe it when I see it.” Also, Nevin Adams, Chief of Communications and Marketing at the American Retirement Association, said “I would not count on it. James Watkins III, JD and CFP, said “As a securities/ERISA attorney, I can assure you that the plaintiff’s bar is definitely ready to address these issues.”
Similarly, James Holland, fiduciary advocate at Millennium Investment and Retirement Advisors, said “there is going to be a growing number of fiduciaries who have spent far too much time with their head buried in the sand or under the false belief that the ‘professional’ they hired is protecting them. Lesson #1 being a ‘financial advisor’ or ‘financial professional’ does NOT make you qualified to work in ERISA.”
While the opinion of fiduciary experts is that repealing the DOL fiduciary standard has a long, uphill legal battle ahead, just the like the repeal of the Affordable Care Act, the Trump Administration’s intent to repeal the pro-investor regulation should make investors wary of future attempt to put the interests of the investment and insurance industries ahead of those of individual investors.
Why the Financial Industry Hates the Fiduciary Standard
By pushing through the fiduciary standard against a hostile industry, Congress and rabid, anti-investor lobbyists, the U.S. Department of Labor, led by Phyllis Borzi, has accomplished an extraordinary feat. The new regulations mean employers and 401(k) providers have to reveal fee and expense disclosure regulations affecting the $4.5 trillion 401(k) market. Since 401(k)s have become the default retirement financing vehicles for Americans, disclosing fund fees, conflicts-of-interest, and expenses and under-the-table revenue sharing deals to investors will make investors better informed and hopefully improve their investment’s total return.
That’s because higher fees directly impact a fund’s net return. Lower expenses translate into a higher return. As described in the book, How 401(k) Fees Destroy Wealth, over time, lower mutual fund fees can mean up to a million dollars in savings to an individual’s retirement account.
For example, if one fund charges 1.2% in annual expenses compared to another which charges 2.4%, over 20 years the amount lost to this fee difference totals more than $1.1 million. That is $1.1 million in the average investor’s pocket. Without the DOL’s new fee disclosure regulations, that $1.1 million would go to a portfolio manager and their mutual fund company which would not be providing any additional services for that huge amount.
Just how powerful is this fiduciary rule? In January 2017, Morgan Stanley decided to cut fees for its wealth management division even though the future of the fiduciary standard is in doubt because of the Trump administration. Morgan Stanley’s decision to cut fees shows they fear possible lawsuits, so cutting fees may reduce that possibility. They certainly did not cut fees because it was in the best interests of their clients.
Why the DOL Wants To Cut Fees
The DOL’s publicly stated goal in implementing the new regulations (specifically 404(a)(5)), is to reduce fees and expenses paid by plan participants by an astounding $14.9 billion.
The DOL also estimates that it will cost plan and 401(k) services providers about $2 billion to comply with the new regulations. As part of this unprecedented level of disclosure, the retirement plan industry is expected to suffer an estimated $16.9 billion in lost revenues and added expenses.
This is why the industry hates the DOL fiduciary regulations. With too few exceptions from independent financial advisors and pro-fiduciary Registered Investment Advisors (RIAs), it’s all about the money and never the investors.
Stay tuned for more anti-investor initiatives from the Trump Administration. This effort is just starting.