After an initial delay, the Department of Labor's fiduciary rule is set to be implemented on June 9. The rule would apply the fiduciary definition established under the Employee Retirement Income Security Act of 1974 to all financial professionals who work with retirement plans or offer retirement planning advice.
In simpler terms, the fiduciary rule is designed to offer protection to investors by preventing advisors from offering conflicted advice. That in itself has positive implications, but there may be an additional benefit if it becomes less expensive to invest for retirement.
"The fiduciary rule mandates that advisors put their clients first before their own profit interest, requiring them to protect retirement accounts from high fee products that could diminish their retirement savings," says Alma Piscitello, executive vice president at The Gemini Companies in New York. "This places fund fees in the spotlight."
According to a Morningstar report, the implementation of the fiduciary rule will spark the launch of more than 3,500 shares of two new classes of low-fee offerings in individual retirement accounts. The report notes that the maximum front-end loads for Class A shares cost 4.85 percent of the investment on average. By comparison, the new Class T shares will cost 2.5 percent or less while clean shares would eliminate the fee altogether.
New share classes are a necessity because of the way the fiduciary rule is structured, says Hunter Unschuld, founder and CEO of The American Society of Fiduciary Education.
"A problem with the fiduciary rule is that the only enforcement mechanism is a class-action lawsuit," Unschuld says. "In order to help commissioned brokers avoid a lawsuit, there needs to be a new share class."
Unschuld says the idea behind the new share class is to create uniformity in what brokers are selling to avoid perceived favoritism. The question for investors is whether these new shares will yield any significant savings in their retirement portfolios over time.
Terry Dunne, managing director of retirement services at Millennium Trust Co. in Chicago, says the key benefit to investors associated with the new T and clean shares is lower fees but he acknowledges that comparing them to Class A shares may prove difficult in the short-term.
"They'll likely be 50 basis points lower, but it's too soon to know for sure," Dunne says. "We do know that T shares and clean shares will be lower than A shares, but there are many other choices that are possibly less expensive. The T shares have sales loads while clean shares have asset management fees."
Minimizing fees as much as possible is critical for preserving investment returns.
"Managing costs is always important, pre-retirement and in retirement," Dunne says. "The more you have invested, the more important it becomes."
Consider this example. Assume you make an initial investment of $100,000, which then earns a 6 percent annual return over 25 years. According to a Vanguard analysis, that $100,000 would grow to approximately $430,000, with no fees taken out. When you add in 2 percent a year in fees, however, that number shrinks to $260,000. The fee diminishes roughly 40 percent of your account's value.
The new share classes would be designed to reduce those costs. According to Morningstar, for example, an investor who rolls $10,000 into an IRA and opts for a T share in place of an A share would have an immediate savings of about $235. That same investor would save an extra $1,789 for every $10,000 invested over 30 years.
Keeping your timeline in perspective, and the amount you plan to invest, is important for determining the overall savings benefit of choosing the new Class T and clean shares over A shares.
"With T shares and clean shares, investors need to analyze how long they will likely hold on to these investments," Dunne says.
Following the previous Morningstar example, the more you invest, the more you stand to save but you may get less value from the new share classes if you have a shorter horizon until retirement.
Unschuld says that the fiduciary rule also sets new disclosure rules that have the potential to reduce other investment fees.
"The implementation of the fiduciary rule could potentially lead to a 1 to 2 percent savings in fees that investors are paying," Unschuld says. "The rule will force advisors to disclose all costs. Investors will be able to see what they are paying in commissions, the cost of funds and any fees the advisor is charging."
Joseph Maugeri, managing director for corporate relations at CFP Board in the District of Columbia, says increased transparency is the most fundamentally important aspect of the fiduciary rule for investors.
"More transparency will allow consumers to make informed choices about share classes, advisory fees and other expenses to decide what products and services are right for them," Maugeri says. "Eliminating conflicts will put the investor and the advisor on the same side of the table, working toward the same goals."
Piscitello says the fund industry is in need of a clean-up in the share class alphabet soup and that T shares may be the impetus for a change that's overdue.
"It's like 'Back to the Future' when fund companies only had share classes with no 12b-1 fees," Piscitello says.
With the fiduciary rule's implementation slated for June, it may be a good time to consider the fees investors are paying for investments outside of retirement accounts. If you're not working with a fiduciary to manage taxable investment accounts, that's something to address if reducing fees is a priority.
"An investor can work with a fiduciary now, even before the fiduciary rule is implemented," Unschuld says. "If an investor wants to avoid fee-gouging, they should work with a true fiduciary now."
Unschuld says cost-conscious investors should do their due diligence when working with an advisor or mutual fund company. He also recommends a proactive approach when it comes to understanding the fee structure of various investments.
"An investor should ask their advisor or mutual fund company for a full disclosure of all fees and commissions," Unschuld says. "Go to Morningstar and look up the mutual fund expenses. Do your homework and know where your money is going."
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