In today’s world of finance, simply providing the benefit of retirement savings for employees is no longer enough.
With all the continuous change to retirement plan regulations, many business owners and independent community pharmacy owners are being surprised by what it means to be a fiduciary and the consequences of not complying with regulations.
While, the basic rules of fiduciary responsibility for a retirement plan sponsor have not changed, new regulations now mean a business owner is no longer solely responsible for ensuring the retirement plan is in compliance with ever-growing regulations.
Your role has not changed, but now you’re not alone
Business owners are still required to act in the best interest of their employees, carry out their duties prudently, offer diversity in investments, and pay only reasonable plan expenses. That being said – there is a significant change that everyone needs to know about.
In 2016, the Department of Labor created a new ruling known as the Fiduciary Rule. This was designed to hold all financial professionals who work with retirement plans to the same level of responsibility as the plan sponsor/business owner, a fiduciary. Great news, right?! I mean, why would anyone want to work with a financial professional who is not required to act in your best interest?
What if I told you that most people have been working with, and are still working with, brokers who are not legally required to act in their client’s best interest? Now, to be fair, many agents who represent these brokers, truly want to help and actively find ways to benefit their clients. It is not the individual agent, but the system itself that has robbed business owners and retirement plan participants for years. Unfortunately, as it stands right now, these brokers are not even legally required to disclose all the fees and commissions that they are making.
So now, brokers are going to change, right?
Maybe… eventually… but not without a fight. The original phase-in date for the Fiduciary Rule was scheduled for April 10, 2017. Through lobbying, the industry has pushed back and has already delayed this rule from going into effect by six months, and will continue to push further in hopes to negate it all together. Additionally, many brokerage firms are trying to take a proactive approach, by adding a wrap fee to their accounts. You may have already experienced your agent propose a fee, around 1.3% - 1.9% of total assets in the plan, all presented in the name of full disclosure and fairness. Despite the larger brokers’ effort, recent news came out that the Fiduciary Rule will become effective as of June 6th, 2016.
How are these brokers making so much money without us knowing?
The introduction of a wrap fee by some brokers is a good start. I mean, at least you now know a little more about the fees you are paying. The issue comes with the fact that it is not all you are paying. Brokers are trained to make you focus on that wrap fee, and paint a picture that this is the only fee you are paying. However, there are still hidden fees, such as; loaded funds, increased expense ratios on those funds, and don’t get me started on the excessive fees that occur if your retirement plan is held in an insurance annuity. If absolutely everything was disclosed, and in an easy to read format, then one would see that it is very typical to pay upwards to a total of 3%-5% on total assets, and if you are in a 401(k), go ahead and throw a couple more thousand dollars in per year for administration.
Increased expense ratios?
The expense ratio is the annual fee that all mutual funds carry. This fee is a percentage charged every year out of the investments to its shareholders to cover general management fees, administrative fees, operation cost, and 12b-1 fees. All of the fees and costs associated with these mutual funds are necessary, except for 12b-1 fees. 12b-1 fees are where the foul play comes in. This is a commission paid back to the broker/agent from the mutual fund company for selling their fund. This can fluctuate from fund company to fund company, but can be as high as an additional 1% paid per year.
Furthermore, without the 12b-1 fee, the average passively managed expense ratio for index funds falls around 0.25%.
Now the question becomes, “does my agent recommend the fund that is best for me, or does the agent recommend the fund that pays the brokerage firm more?”
Well this is depressing… what should I do now?
Before you liquidate your retirement plan and start shoving cash under your mattress, there is a solution and it is not a new thing!
Sometimes I get fired up and on a soap box because I am so passionate about educating independent community pharmacies on the excessive and often hidden fees they are paying within their retirement account. It never fails, I get the question, “Aren’t you in the investment industry? If this is all true, why would you want people to know how much you are making?”
It’s true, I am an Investment Advisor Representative, and I specialize in retirement plans for independent community pharmacies. The difference is that I do not work for a broker. I work for an independent Registered Investment Advisor. Registered Investment Advisors are independent of these brokerage firms.
So, what is the difference?
There are quite a few differences, but one of the main ones is that Registered Investment Advisors (RIA) are fiduciaries and have been all along. That means that RIAs are not only morally and LEGALLY required to act in your best interest, it’s who they are, and have always been; it’s simply the right way to do business. RIA firms do not collect 12b-1 fees. RIAs also disclose all fees associated with 401(k) and other retirement plans upfront and in an easy to read format. Essentially, RIA firms have always held themselves up to a different standard and set of rules than brokers.
We’re talking about your retirement money! You deserve to be treated fairly and know exactly what you are paying, and your advisor should be held accountable during the process.
At Pharmacy401k we not only provide a low-cost option for 401(k) retirement plans, but as fiduciaries, we are constantly searching for a more prudent strategy. Even if a new strategy would negatively affect our compensation, we are still required and willing to bring it to our clients and customers. Unlike most brokers, we also take the time to customize each 401(k) to provide an optimal retirement plan that fits the pharmacy owner’s goals as well as the goals of their employees. Every owner is different, every pharmacy is different, and a one-size-fits-all approach is not the answer.
It would be my pleasure to provide any assistance you need to find the optimal retirement plan solution. If you have any questions or would like more information, call (843)720-3756 or email me at tyler@waypointus.com