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New Dept. of Labor Rules: How Do They Affect Your 401(k)?
This week, the U.S. Department of Labor is implementing some new rules, and these may affect your 401(k). Here's what it might mean for you.
New U.S. Government Department of Labor rules went into effect yesterday, Dec. 27, 2011. This new rules are intended to help individual company retirement plan participants make better choices about how to invest their company 401(k), 403(b), or similar company retirement plans.
The new rules will allow company retirement plan sponsors to potentially hire the company retirement plan provider to provide investment advice to individual company retirement plan participants.
The rules state that the provider of your company retirement plan, companies such as Fidelity, Vanguard or T. Rowe Price, will be able to provide investment advice to individual plan participants who ask for investment help.
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Going forward, individual company retirement plan participants will have access to impartial investment advice on their company retirement plan options from an unbiased source.
Previously, investment advice for individual company retirement plan participants could only be provided by independent outside advisers. The Department of Labor concern was that a company retirement plan provider could steer individual company retirement plan participants into the company retirement plan provider’s mutual funds in the company retirement plan menu.
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The more money that individual company retirement plan participants invest in the mutual funds owned by the company retirement plan provider, the more investment management fees would be paid to the company retirement plan provider.
Under the new rules, investment advisors hired by the company retirement plan sponsor will be allowed to collect investment advice fees for investments they recommend if the following two conditions are met:
The compensation of the investment advisor is not affected by the advice they give to individual company retirement plan participants. Any fees the investment advisors collect must be the same level fee percentage, no matter what the investment option in the company retirement plan menu they recommend.
The investment advice offered by the investment advisor is based on a computer model that has been certified as unbiased by an independent third party.
Under the rules, the retirement plan investment advice provider must also take into account the age, life expectancy, target retirement age, risk tolerance and other factors of their individual company retirement plan advice clients.
The new rules are a great idea. But it is ultimately up to the company retirement plan sponsor to decide whether to implement the rule. Not all company retirement plan sponsors will choose to make the third-party investment advice available to their individual company retirement plan participants.
Company retirement plan sponsors will still have a fiduciary duty to act in the best interests of their company retirement plan participants when choosing and monitoring the investment advisers that they make available for investment advice services.
