Although “fiduciary” is not a word used in everyday conversation, it’s a term every investor would do well to learn. ”Fiduciary” principles — derived from the Latin word for “trust” — have become a mainstay of modern law and society.
Having debuted in written law during the time of the Romans and gained prominence in English common law, today fiduciary principles are called upon to govern relationships of trust spanning many sectors, including retirement plans and health care, charities, family relationships and guardianships, corporations and employment, bankruptcy and trusts, and the list goes on.
A fiduciary relationship requires the utmost allegiance — what Supreme Court Justice Benjamin Cardozo famously described as “the punctilio of an honor the most sensitive.”
On June 29, the Department of Labor issued a proposal to strengthen and harmonize requirements for fiduciaries that provide investment advice to participants in employer-sponsored retirement plans and individual retirement accounts (IRAs).
In its proposed Improving Investment Advice for Workers & Retirees Exemption, the department furthers the Trump administration’s commitment to putting workers first by strengthening participant protections while preserving investment advice options in privately sponsored retirement plans. This effort will help empower Americans to make independent and informed financial decisions, save for retirement and build individual wealth.
The department’s proposal, which authorizes a wide variety of beneficial advice relationships while protecting retirement investors from abuse, is necessary in light of the many changes to the retirement market in recent decades, including changes to the ways retirement savers access investment advice. In the last half-century, we have seen a significant shift in the retirement landscape as workers now have more control of and responsibility for their retirement savings.
In 1981, about 64% of all pension plan participants had a “traditional” defined benefit pension. By 2017, this number was only 25%. Instead, defined contribution plans such as 401(k)s have grown in popularity, and in 2019, retirement savers had a total of $7.4 trillion invested in these plans.
The explosive growth in 401(k)-type plans and IRAs means that workers are increasingly contributing to and managing their own retirement savings. While this increased control provides retirement savers with greater flexibility, there is also potential for abuse. In response to this concern, the Department’s proposal requires advisors to base their investment recommendations, including recommendations to roll assets out of 401(k) plans, on the best interests of workers — and not on the best interests of the advisor.