“It just so happens that your friend here is only MOSTLY dead. There’s a big difference between mostly dead and all dead. Mostly dead is slightly alive.”
The fiduciary rule is...dead?
On June 21st a U.S. Appeals Court voted to vacate the Department of Labor’s Fiduciary Rule. “Retirement Investors, you’re back on your own,” the New York Times railed. We have mixed feelings whether and how a rule like this should be enforced at the federal level. We don’t have mixed feelings whether or not every financial advisor should act like a fiduciary to their clients—that is, in their clients’ best interest. This objective should be the case whether they use a particular word and/or whether they claim to abide by any mandated standard. Financial advisors should serve as fiduciaries because of the nature of what they’re advising on and the context within which that advice is given. Period.
So what exactly does being a fiduciary entail then, if the spirit must live on regardless of federal regulations? The DOL gives us the following summary list of fiduciary qualities. (More detail from the horse’s mouth here.)
Acting solely in the interest of plan participants
Prudence
Following plan documentation
Diversification within investments
Reasonable expenses
In today’s article, we want to simplify it even more and consider on the most practical level what it feels like to receive services from a fiduciary.
Perspective as a Starting Point
While we agree with the above list, our “fiduciary starting point” isn’t what you might expect. One of the biggest problems the financial services industry (forgive the broad generalization) has created for most American savers and investors is convincing them that they don’t have a lot of money. Now, to be fair, human nature does a lot to help drive this notion home, but the industry certainly pushes the right buttons.
We meet with many business leaders in their roles as plan sponsors and with even more workers who participate in the retirement plans overseen by these plan sponsors. One of the most frequent sentiments we hear in these encounters is a self-consciousness regarding the amount of money in an account. It takes a few forms:
“I know it’s not a lot of money, but ….”
“Our plan isn’t a big account, but it is our employees’ money.”
“I know I haven’t saved enough. It’s embarrassing.”
“You probably don’t even want to talk to someone with such a small account.”
This line of thinking, no matter how subconscious, leads to apathy in saving and investing. If, individually, employees who are saving in a plan don’t think that their account balances have a lot of money in them, they won’t care much about them. At the same time, if the employer running a plan doesn’t think the sum of the individual account balances don’t amount to a lot, they won’t care much either. It’s not their fault. They have been trained over time to think it’s not that much money, so it really doesn’t matter all that much.
We believe serving as a fiduciary begins with helping people understand the value of a dollar–that the money in their accounts, no matter how small, matters and has the potential to grow exponentially. Sounds too simple to be true, right? We’re consistently amazed at the impact a little perspective can bring to the decision-making involved in retirement investing.
How to Grow with Right Perspective
If we don’t set the record straight and let the affected retirement plan participants and plan sponsors know they are in fact dealing with a lot of money, we fail. How do we get there?
Consider the power of saving on autopilot and compounded growth. Imagine a new-saver who’s already feeling self-conscious because he never participated in his company’s 401(k). Now he’s at a new job and facing the opportunity to begin again with the 401(k). Even though he’s already 45, for example’s sake, and has admittedly not saved well, he still has the potential to save a lot…
If he makes $40K and saves 6% plus employer match of 3%, after 20 years (assume 5% annual growth) he’ll have about $125K, (and presumably he’ll enter retirement at a very low tax bracket to eat into that savings). To a worker who maxes out their salary at $40K annually, I bet $125K feels like a lot of money.
But what if he does get 3% raises each year and works five more years, retiring at 70? Now his savings have grown to over $255K. The power of saving on autopilot and compounding returns cannot be overstated.
According to the Bureau of Labor Statistics, the median salary in the U.S. at the beginning of 2018 was $59,055. Just imagine all the savings the American workforce collective is capable of. Seems like an achievable goal. It starts with perspective–one that encourages participants to care and save, and sponsors to be wise in their matching and plan design. And it involves advisors, record-keepers, fund families and other vendors too–to keep costs reasonable so money stays in those accounts.
More from us on the fiduciary mindset in subsequent posts. For now, we’re reminding you that in spite of the industry's hard fight to ensure the fiduciary rule would be dead, it's only mostly dead. The bad side of mostly dead…the new rule was only ever going to affect industry players. Plan sponsors, you've always been on the hook, and the fiduciary standard is alive and well for you, just with the same landmines for you and your plan participants as before. And the good side of mostly dead…the consumer education rising from the rule has been huge, and you can always demand a fiduciary standard from your advisor—no matter what they're advising on. It's your money. It's a lot and with a little care it will grow to a lot more.