The Obama administration’s string of proposals to regulate the financial services industry may have some negative consequences for 401(k) plan sponsors, particularly smaller ones.
Among the proposals, which were announced Wednesday, June 17, is one that would impose “fiduciary duty” on brokers who provide investment advice, which is a more stringent standard than what they are held to today, experts say.
Currently the legal standard that brokers must meet is a “suitability test,” which means that the broker believes a specific investment option is a reasonable investment for a client of a certain age. The higher standard of fiduciary duty means that the broker is acting in the best interest of clients.
“Suitability is more of a concept that applies to how you operate,” said Charles Ledbetter, a principal at Mercer. “There is wider latitude on suitability than fiduciary duty.”
The proposed change could have big consequences for small plan sponsors, or those with 100 to 300 employees, which typically use brokers to manage their plans. “These employers should find out if their brokers are going to take on this additional responsibility or if it is a deal breaker,” Ledbetter said. “Some brokers might decide they don’t want to do this because the risk is too high.”
As a result, some small plan sponsors might have to find new brokers to manage their plans, he said.
Another concern that some experts have about the proposal is that if it becomes law, it might actually end up watering down how fiduciary standards are currently defined.
“My concern is that they impose a fiduciary standard on brokers but they end up watering it down,” said Don Stone, president of Chicago-based Plan Sponsor Advisors. “That would be bad news for all 401(k) plan sponsors.”
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