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The Fiduciary Rule: Exposing Your 401(K) Advisor’s Secrets

It’s here.  On June 9, 2017, the long awaited Fiduciary Rule for 401(k) plans will arrive.  The wirehouse and broker-dealer community within the investment industry has fought this new rule every step of the way.  Why? Because their secrets are about to be exposed.  Fee gouging in these 401(k) plans has spiraled out of control and it has gone on for way too long.  While the Fiduciary Rule was designed to better protect plan participants within these employer sponsored retirement plans, the response from the broker-dealer community, in an effort to protect themselves, may actually drive the fees in 401(k) plans higher than they are now.    

If your company sponsors an employer sponsored retirement plan and your investment advisor is a broker with one of the main stream wirehouses or broker dealers then they may be approaching you within the next few months regarding a “platform change” for your 401(k) plan.  Best advice, start asking questions before you sign anything!!  The brokerage community is going to try to gift wrap this change and present this as a value added service to their current 401(k) clients when the reality is this change is being forced onto the brokerage community and they are at great risk at losing their 401(k) clients to independent registered investment advisory firms that have served as co-fiduciaries to their plans along.

The Fiduciary Rule requires all investment advisors that handle 401(k) plans to act in the best interest of their clients.  Up until now may brokers were not held to this standard. As long as they delivered the appropriate disclosure documents to the client, the regulations did not require them to act in their client’s best interest. Crazy right?  Well that’s all about to change and the response of the brokerage community will shock you.

I will preface this article by stating that there have been a variety of responses by the broker-dealer community to this new regulation.  While we cannot reasonably gather information on every broker-dealers response to the Fiduciary Rule, this article will provide information on how many of the brokerage firms are responding to the new legislation given our independent research.

SECRET #1:   

Many of the brokerage dealers are restricting what 401(k) platforms their brokers can use.  If the broker currently has 401(k) clients that maintain a plan with a 401(k) platform outside of their new “approved list”, they are forcing them to move the plan to a pre-approved platform or the broker will be required to resign as the advisor to the plan.  Even though your current 401(k) platform may be better than the new proposed platform, the broker may attempt to move your plan so they can keep the plan assets.  How is this remotely in your employee’s best interest? But it’s happening.  We have been told that some of these 401(k) providers end up on the “pre-approve list” because they are willing to share fees with the broker dealer. If you don’t share fees, you don’t make the list.  Really ugly stuff!!

SECRET #2: 

Because these wirehouses and broker-dealers know that their brokers are not “experts” in 401(k) plans, many of the brokerage firms are requiring their 401(k) plans to add a third-party fiduciary service which usually results in higher plan fees.  The question to ask is “if you were so concerned about our fiduciary liability why did you wait until now to present this third party fiduciary service?”  They are doing this to protect themselves, not the client.   Also, many of these third party fiduciary services could standardize the investment menu and take the control of the investment menu away from the broker.  Which begs the question, what are you paying the broker for?

SECRET #3: 

Some broker-dealers are responding to the Fiduciary Rule by forcing their brokers to move all their 401(k) plans to a “fee based platform” versus a commission based platform.  The plan participants may have paid commissions on investments when they were purchased within their 401(k) account and now could be forced out of those investments and locked into a fee based fee structure after they already paid a commission on their balance.  This situation will be common for 401(k) plans that are comprised primarily of self-directed brokerage accounts.  Make sure you ask the advisor about the impact of the fee structure change and any deferred sales charges that may be imposed due to the platform change.

SECRET #4: 

The plan fees are often times buried.  The 401(k) industry has gotten very good at hiding fees.  They talk in percentages and basis points but rarely talk in hard dollars.  One percent does not sound like a lot but if you have a $2 million dollar 401(k) plan that equals $20,000 in fees coming out of the plans assets every year.  Most of the fees are buried in the mutual fund expense ratios and you basically have to be an investment expert to figure out how much you are paying.  This has continued to go on because very rarely do companies write a check for their 401(k) fees. Most plans debit plan assets for their plan fees but the fees are real. 

With all of these changes taking place, now is the perfect time to take a good hard look at your company’s employer sponsored retirement plan.  If your current investment advisor approaches you with a recommended “platform change” that is a red flag.  Start asking a lot of questions and it may be a good time to put your plan out to bid to see if you can negotiate a better overall solution for you and your employees.

 

About Greenbush Financial Group

Greenbush Financial Group, LLC is an independent registered investment advisory firm located near Albany, NY.  The firm offers employer sponsored retirement plans, fee based financial planning, and investment management services.

 

Investment Advisory Services offered through Greenbush Financial Group, LLC.  Greenbush Financial Group, LLC is a Registered   Investment Advisor.  Securities offered through American Portfolio Financial Services, Inc. (APFS). Member FINRA/SIPC.  Greenbush Financial Group, LLC is not affiliated with APFS.   APFS is not affiliated with any other named business entity.  This material is for informational purposes only. Neither APFS nor its Representatives provide tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions. Mike Ruger is a registered representative with American Portfolio Financial Services, Inc.  Information in this illustration has been obtained from sources believed to be reliable and are subject to change without notification.  The information presented is provided for informational purposes only and not to be construed as a recommendation or solicitation.  Investors must make their own determination as to the appropriateness of an investment or strategy based on their specific investment objectives, financial status, and risk tolerance.  Past performance is not an indication of future results.  Investments involve risk and the possible loss of principal.  Any opinions expressed in this discussion are not opinions or views of American Portfolio Financial Services, Inc. (APFS) or Greenbush Financial Group, LLC.  Options expressed are those of the writer only. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.  Diversification does not ensure against market risk.  The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investments may be appropriate for you, consult your    financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and cannot be invested into directly.

 

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Investment advisory services offered through Greenbush Financial Group, LLC. Greenbush Financial Group, LLC is a Registered Investment Advisor. Securities offered through American Portfolio Financial Services, Inc (APFS). Member FINRA/SIPC. Greenbush Financial Group, LLC is not affiliated with APFS. APFS is not affiliated with any other named business entity. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.