The Department of Labor recently introduced its revised “fiduciary rule”, requiring financial advisers to act “solely in the interest” of clients when giving advice on retirement saving.

It’s a major victory for consumers that has come about after a long fight. An original proposal was put forward in 2010 to require more retirement investment advice to be in the client’s best interest. It was withdrawn in the face of massive opposition. The DOL’s proposal in 2015 also faced efforts to block it, but the final rule was released on April 6, 2016.

The new rule was introduced to accommodate for the changing retirement landscape since the Employee Retirement Income Security Act (ERISA) was passed in 1974. The move to 401(k) plans and Individual Retirement Accounts (IRA) has transferred responsibility for investment decisions from
employer to employee. This has left many workers without returns that will maintain their standard of living in retirement.

The function of the rule is to expand ERISA’s requirement that those who provide retirement advice within the context of retirement investment must act as fiduciaries, ie in the best interests of clients.

Advisers will now be held to the fiduciary standard not only in regard to 401(k) assets but also distributions from 401(k) plans and IRA assets. Even the recommendation to roll over is a fiduciary act. These integral parts of the retirement income system should now be held to the “best interest” standard in order to protect consumers.

An important thing for financial consumers to remember is that the “Best Interests Contract” provides for the continued use of commissions, through requiring brokers to sign a contract that says they are putting the customer’s best interest first. In addition, this means that retirement savers will have a private right of action for any breach of contract, which is particularly important for advice regarding IRAs, which haven’t up to now been covered by ERISA.

The rule is a definite victory for consumers that looks set to protect retirement savers from the lure of expensive products, and ensure that they get advice for how best to provide for their future.

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