The year in retirement: Fiduciary rule, lawsuits ‘raise consciousness’
The Department of Labor’s new fiduciary rule drove the past year in retirement and, despite uncertainty as to how President-elect Trump will approach the rule, it is still expected to have a big impact on retirement plans as it takes effect in April 2017. As for the rest of the retirement world, 2016 will be remembered as a year of several class-action lawsuits against mostly large plans.
Nevin Adams, chief of marketing and communications at the Arlington, Va.-based industry trade group the American Retirement Association, urges advisers to be ready for the fiduciary rule to begin as planned, as Trump has not said anything about the fiduciary rule. Any changes to the rule are “probably a second-tier effort, so [the fiduciary rule] will come into play the way it is laid out and [may] get tweaked later,” Adams says.
He thinks tweaks, which he notes is wild speculation, may be around the best interest contract exemption and how it applies and conditions associated with it. “The sense is this is still pretty [difficult] and compliance will be an issue,” he says.
This past year as the fiduciary rule developed offered a “very important opportunity to start — yet again — a conversation around fiduciary best practices and [to] clarify rules with clients and prospects,” says Shelby George, SVP of advisor services at Rochester, N.Y.-based investment manager Manning & Napier.
Alex Assaley, principal and lead adviser for retirement plans at Bethesda, Md.-based AFS 401(k) Retirement Services, says that while multiple people in the industry, including himself, believe the structure of the fiduciary rule is a good thing, it is going to “drastically change the industry and some things that are going to be changed are for the better, in terms of removing conflict of inflict and ensuring there is proper disclosure around relationships and conflicts of interests.”
In addition to the industry-changing fiduciary rule, 2016 can be also be summed up as a year of major lawsuit against plans, “centered around high-cost, poor-performing investments riddled with hidden fees and used to pay vendors and promote conflicts of interests,” says Brian Menickella, co-founder and managing partner at King of Prussia, Pa.-based financial services firm The Beacon Group of Companies.
While suits against plans have gone on for a decade, there was a fresh wave of litigation this year, with arguments moving beyond allegations of charging excessive fees to allegations of not using the lowest class of mutual funds, Adams adds.
The court cases reveal “the levels of abuse that are prevalent in the 401(k) plans of [the] biggest companies. But the sheer volume of them in alarming,” Menickella explains. “No institution has been exempt; large companies, small companies and even some of the most respected universities have been targeted. This has resulted in a tsunami of lawsuits.”
In August, lawsuits were filed against Yale University, the Massachusetts Institute of Technology and New York University after the institutions allegedly made their employees pay excessive fees for retirement plans, according to The Wall Street Journal.
“The common denominator in all the cases was that the compensation models to advisers were conflicted,” explains Menickella. “Specifically, advisers … were not required to put their clients’ best interest above their own.”
As a result of these suits, the term fiduciary became more of a buzzword, leading clients to ask more questions, a trend Menickella expects to continue into 2017.
In addition, the lawsuits, Menickella says, have led to employees becoming smarter about their retirement and looking for employers to step up their game due the influx of 2016 401(k) class-action suits.
Assaley predicts that these suits may also lead to a trend of moving to low-cost index funds, which strip out revenue sharing. His firm has moved all clients to a zero revenue-sharing environment, where his fees are charged as a line item.
“The raised consciousness trend started in 2016 and will increase in 2017 with the implementation of the fiduciary rule,” Menickella explains. “The trend is that people are becoming more aware and demanding their advisers act in a best interest capacity.”
Adams expects these suits to continue through 2017, and may begin against smaller plans. “Hopefully that has your attention,” he says. “The whole industry will tell you big plans today, but little plans tomorrow.”
Among other 2016 issues in retirement were:
· Higher gains: In Fidelity’s latest quarterly analysis in November, it found that the average account balance of a 15-year saver was $331,200, up from $43,900 in 2001.
· Emphasis on retirement: As a result of the Affordable Care Act, the appeal of healthcare benefits to employees has decreased, while simultaneously increasing the importance of retirement plans as a tool to recruit and retain employees, according to a survey. A September survey by Harris Poll on behalf of Nationwide found that 29% of owners of businesses with fewer than 300 employees that offer 401(k) plans and plan to increase contributions say that they are doing so because the ACA has made health benefits less attractive to employees. Further, 43% of business owners who plan to increase contributions to their company’s 401(k) plan say they are doing so because their plan is now more important for attracting and retaining employees as a result of the ACA.
· Emphasis on financial wellbeing: In its August Retirement Plan Governance Survey, Willis Towers Watson found that employers are increasingly concerned for their employees’ financial wellbeing and are planning to take action to help them retire in a timely manner. Many of the employers surveyed responded that they plan to shift resources to financial wellness and retirement readiness over the next couple of years.
· Growth of robo-advisers: Robo-advisers reach all kinds of employees who don’t have easy access to financial advice. It combines technology with a human touch to most benefit employees, says Andrew Wank, director of business development at Bloom.
2017 tax reform
Looking ahead, a big buzzword in 2017 will be tax reform, American Retirement Association’s Adams believes. “We know that President-elect Trump is committed to doing something on tax reform [and] he has a lot of support for that on Capitol Hill,” he says.
With the last major tax reform in 1986, Adams predicts that the preferential tax treatment of retirement plans will be a target in this new round of reform. Previous proposals by Rep. Kevin Brady (R-Texas), chairman of the powerful House Ways & Means Committee, have pointed to a do-it-yourself retirement model, as opposed to the emphasis behind the structure of an employer-based plan, Adams says.
Trump told the AARP in an interview that his plan is to pass comprehensive tax reform by “removing carve-outs for special interests and reducing the number of brackets.” He also said he would attempt to eliminate the alternative minimum tax and the death tax. Improving the economy and repealing the Dodd-Frank and Affordable Care Acts, he told the AARP, would “bring market forces to bear that will increase competition and lower costs to consumers.”
The one thing most experts agree on is that nothing will happen immediately. It always takes time for a new administration to gather steam.
“Tax reform is our big issue,” Adams says of the American Retirement Association. “We think it will be a big deal and we fully expect it to be battle for people who care about the private sector.”