Retirement Reform Grumbles Spark Rebukes

Current standards offer too much wiggle room in terms of 'if it's good for me, its good for the client,' some say.
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BOSTON (

TheStreet

) -- Brokers are bracing for federally mandated change in how they explain fees and present information to their retirement-minded investors. The grumbles have begun, but defenders of the law are also speaking up.

Current standards offers substantial wiggle room in terms of "if it's good for me, its good for the client," says Edward Lynch, managing director of

Fiduciary Plan Governance

, a Boston-based fiduciary practices consultant and chief retirement officer of

Dietz & Lynch Capital

. A strong fiduciary standard allows no such shade of gray, and Lynch thinks all signs point to a broadly applied fiduciary standard to anything "that looks and feel and smells like advice."

"Reasonable people can and do disagree as to what 'advice' is," Lynch acknowledges.

And, linguistic slogging aside, crafting fiduciary standards and fee structures for retirement plans can also be mired in a political landscape fueled by anger, steeped in mistrust but somewhat naive when it comes to self-interest.

Although debate over potential conflicts of interest are a sticking point, Lynch says, "my sense is that most brokers do try to interact in a way that is in their client's best interest. But it's a conflicted process."

Last month, the U.S. Department of Labor announced a final 401(k) rule it says will give an estimated 72 million plan participants -- with combined investments of nearly $3 trillion -- greater information on fees and expenses.

The final regulation requires plan fiduciaries to: give workers quarterly statements of plan fees and expenses deducted from their accounts; give participants core information about investments available under their plan, including the cost of these investments; and present the information in a format that makes it easier to comparison shop among the plan's investment options. The rules kick in Dec. 20.

In July, the passage of Dodd-Frank Act -- yet to be fully shaped, with legislative action delayed by midterm-election paralysis -- authorized the SEC to impose the same fiduciary duty standards on brokers as investment advisers. Simply put, they would be required to offer only advice and investment recommendations in the client's best interest. With its passage, the clock started ticking on a six-month review process intended to solicit industry opinion.

Once the elusive, legally wrangled definition of advice is resolved, it could prove a game changer for wirehouses, large firms and the broker-dealer community.

'I think what needs to happen is putting your clients interests before your own and to a fiduciary standard of the level of what ERISA requires," Lynch says. "The ERISA standard is client interest only, whereas the fiduciary standard can embrace conflicts of interest as long as you disclose them. I think that is more likely the standard we will see adopted and taking hold. I don't think there will be quite the same degree of wiggle room that the suitability standard allows for. I remember reading a white paper recently that argued for the suitability standard because its 'a best-business kind of standard' and the equivalent of a fiduciary standard -- baloney! It is all lawyering, and that's what the fiduciary standard doesn't allow."

That shift will, however, come with a challenge.

"Even articulating what the fiduciary standard is, you can never define it so precisely and implement it so precisely that people can't talk around it," Lynch says. "I think what we will get is a sort of fog-of-war phenomenon going on. There will be a lot of talking going on about this and creating confusion as to what it is. We encounter it constantly in the retirement consulting area. You see it coming from record-keepers and vendors."

Lynch sees this an a perfect time for new regulations and standards to hit the marketplace because, simply put, there is otherwise a risk consumers may prove their own worst enemy if we enter another bull market and they are swept into another round of "speculative euphoria."

Larger, institutionalized firms may have more to consider than small shop brokers.

"The wirehouse model, where everything is being done under one roof, if you will, is a conflicted model," Lynch says. "They are trying to rectify multiple lines of business and profit centers."

He argues that Dodd-Frank wisely avoided a direct legislative antidote to fiduciary quandaries, giving a still-ticking clock of six months for regulators and the industry to work together. He does add that punting a final decision too far down the road needs to be avoided to prevent it "being massaged it in such a way that it becomes meaningless."

In terms of compensation, Lynch says he has always advocated that the best practice is a "a fee-for-service approach denominated in dollars very specific to services rendered."

Changes in the landscape of retirement plan fees and service charges is being closely watched by Steven Dimitriou, managing partner of Boston-based

Mayflower Advisors

.

"There no doubt it's out there -- fee disclosure is coming in the retirement plan world," he says. "It is a good thing and long overdue. The good providers and the good advisers have been disclosing for quite some time, but this is going to be eye-opening for a lot of plan sponsors and for those with platforms that are not competitive."

A challenge for the DOL was not having fee disclosure backfire, and either scare away investors or prompt them into settling for inferior strategies, Dimitriou says.

"There was been a lot of concern in the industry about what that this was going to look like and whether it would completely overwhelm participants, make them think they are paying more than they should and push them to low-cost funds, like money markets, when that might not be where they should be."

"A big concern is that if fees being disclosed would have to be disclosed in a dollar amount format for the participant," he adds. "That can always be scary. That may still be there, but there is no doubt that it is going to also be reflected as a percentage. I think the important thing for participants to understand is what their total cost is."

Dimitriou says that as investors start hearing about management, administration, revenue sharing and 12B-1 fees, they have to keep in mind that their expense ratio compared with performance is the same as it has always been if they were directly in mutual funds.

"Where this is going to be most eye-opening is in those insurance space platforms, the variable annuity contract platforms, where there is the expense ratio on the fund, but oftentimes there is an additional wrap or asset charge. That has historically been what is very difficult for participants to see and understand. Now it's going to be front and center."

Beyond the potential for reining in unwarranted fees, the new rules could lead to more-informed investors, Dimitriou says. Among the questions they may ask are: "Why do small-cap funds generally turn out to be more expensive?"; "What about foreign funds?"; "What's the real difference between an indexed and a managed fund, and do those differences translate into better performance?"

"The better-educated the participant, the higher the likelihood of a positive retirement outcome," he says. "Because it is now so front row and center, people might initially focus on the expenses as opposed to asking, 'How am I doing?' or thinking 'I'd much rather pay a dime for a quarter than a nickel for a dime.'"

-- Written by Joe Mont in Boston.

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