A Win for Workers: Fiduciary Duty Rule Requiring Clients’ Best Interest be Served is Upheld

Denny DeMay
On May 23rd Secretary of Labor Alexander Acosta wrote an op-ed for the Wall Street Journal in which he stated the Department of Labor would not delay the implementation of the Fiduciary Duty Rule. This rule would require financial advisers to only consider the client’s best interest when advising him on his 401 (k). This rule would be enforced by the Employee Benefits Security Administration of the U.S. Department of Labor.

The rule requires that financial advisers would be prevented from recommending mutual funds on the basis of which ones would pay a bigger commission to them. This was found to be true with many front loaded mutual funds where the rate of return to the investor was lower in part because of the upfront fees for the mutual fund that went to the financial advisor as a commission. All advice regarding a 401 (k) now has to be based on what is best for the client. When the rule was first proposed, it was estimated that workers would gain at least $33 billion in their 401 (K) accounts over the first 10 years the rule was in place. More information about this rule and other regulations regarding pension plans can be found at https://www.dol.gov/agencies/ebsa.

When the existing regulations regarding pensions were put in place in 1975, 401 (K) plans did not exist and IRA accounts had just become available. Retirement plans in 1975 were managed by professionals. Current 401 (k) plans are now primarily the responsibility of the individual investor.

This rule was proposed by the Obama Administration in April 2015 and was finalized in April 2016. Implementation of the new rule would begin in June 2017. The Trump Administration put a hold on final implementation of the rule and required the Department of Labor to go back and review it. The Department of Labor was “directed to examine the Fiduciary Rule to determine whether it may adversely affect the ability of American’s access to certain retirement savings offerings, retirement savings information or related financial advice”. The Securities Industry and Financial Markets Association, a trade association which represents the financial industry, had mounted a vigorous campaign to have the rule overturned. Secretary Ascosta’s decision to not delay implementation of the rule was surprising, since it did not go along with the current administration’s plan to reduce federal regulations on businesses.

Congressional Republicans are upset with Secretary Acosta for not delaying the initial implementation of the rule which is set for June 9th. House Financial Services Committee Chair Jeff Hensarling (R- 5th District Texas) blamed the decision on Obama era bureaucrats at the Department of Labor and claimed they had overruled the wishes of President Trump. Secretary Acosta, a former U.S. Attorney and Dean of Florida International’s law school, said there was no legal basis for stopping or overturning the Fiduciary Duty Rule.

For the record, the author of this article just completed a 36 year career with the U.S. Department of Labor. He spent the last 8 years as president of the largest union at the Department of Labor, representing almost 8,000 field bargaining unit employees.