By: Financial Advisor Tim Hayes - posted in: Employers - Last updated Oct 6, 2019

State and Local Pensions (Maybe Rhode Island Figured it Out?)

by | Last updated Oct 6, 2019 | Employers

Last May, my first article for SOCO Magazine and New England Monthly was about a proposal from the Obama Administration that would require financial advisors to eliminate their conflicts of interest if they wanted to continue to counsel 401(k) plans and individuals with IRAs.

On April 6, 2016, the U.S. Department of Labor (DOL) issued the new Fiduciary Rule. There is a one-year grace period before the law goes into effect.

The financial services industry will most likely be happy with the final rule as some of the most unpopular provisions, such as restricting what products an advisor can offer a client, were eliminated.

The Fiduciary Rule applies mostly to private-sector retirement plans, such as 401(k)s, SEPs, SIMPLEs, and 403(b) plans that fall under ERISA. The 403(b) plans of public employees, such as teachers, are usually not covered by ERISA, so most of those plans are not subject to the new law. It will apply to them if they decide to roll over their 403(b) to an IRA. As all IRAs, Roth’s, traditional, and rollover IRAs fall under the new rules.

The administration believes the rule is needed because conflicts of interest are causing 401(k) participants and IRA owners to pay higher fees, resulting in smaller account balances.

What do I mean by ‘conflicts of interest’? Well, sometimes, an advisor might receive a bonus or benefits if they sell a firm’s proprietary products. This is no surprise. It is a business, but what is surprising is that these conflicts go on with retirement plans — given that ERISA forbids conflicts of interest.

The Employee Retirement Income Security Act (ERISA) was enacted in 1974 to make sure private-sector retirement plans get to run for the benefit of the participants. However, ERISA stipulated that the prohibition against conflicts applied to advisors only on five conditions:

  1. The financial advisor must render advice as to the value of securities or other property;
  2. The advisor must do so regularly;
  3. The advisor must do so under an agreement with the client;
  4. That advice will serve as a primary basis for the client’s investment decisions; and
  5. The advice is to be based on the particular needs of the investment or retirement plan.

That the advice must be given regularly and must be the primary basis for the client’s investment decisions is what the DOL says is allowing financial advisors with conflicts of interest to provide advice without violating ERISA’s prohibition.

Plus, the DOL feels that the 1974 exemptions were put in place when there was no such thing as an IRA or a 401(k), and companies invested the retirement money for their employees. However, now that individuals are responsible for their own investment decisions, new rules are needed.

For example, the DOL believes that people are being advised to roll -over their 401(k)s into IRAs when it would cost them less if they remained in the 401(k). Moreover, under the old rules, rollover advice never fell under ERISA guidelines, because the rollover happened once.

Read more: 401k Rollover Advice

So the new Fiduciary Rule gets rid of the five-part test and replaces it with the requirement that advisors be paid the same no matter what kind of investment plan is used. If an advisor is paid differently according to each particular plan, then the advisor must sign a contract with the client pledging that they do what is in the customer’s best interest.

What does the new rule mean for you? If you have a 401(k), the advisor fees might come down. If you rollover the 401(k) to an IRA, the charges in the IRA should be identical to what they were in the 401(k). If they are not, then the advisor must pledge to do what is in your best interest.

[i] Alicia H. Munnell, State and Local Pensions What Now? (Kindle Version)

[ii] Juan Perez Jr., Bill Ruthhart and Heather Gillers, CPS set for $200 million in cuts; mayor floats property tax plan,

[iii] The State Pensions Funding Gap: Challenges Persist,

[iv] The State Pensions Funding Gap: Challenges Persist,

[v] Alicia H. Munnell, State and Local Pensions What Now? (Kindle Version)

[vi] Alicia H. Munnell, State and Local Pensions What Now? (Kindle Version)

[vii] Alicia H. Munnell, State and Local Pensions What Now? (Kindle Version)

[viii] J.D. Rauh (personal communication, July 14, 2015)

These are the opinions of Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only, and should not be construed or acted upon as individualized investment advice. 

More About Financial Advisor Tim Hayes

Tim provides expert and highly personalized financial planningretirement planning, and independent investment solutions for individuals, couples, and businesses in MA, RI, NH, and ME. 

So when you need an independent financial advisor in Boston and surrounding cities such as Newton and BrooklineSalem or the North Shore, Hingham, or another town on the South Shore, Andover and the Merrimack Valley, Foxboro and the MetroWest, Martha's Vineyard, Nantucket, and Newport, the South Coast and Rhode Island from my Dartmouth office.

There is no charge for the initial consultation, and it can be at your home, office, or favorite coffee shop.

About Financial Advisor Tim Hayes

Tim Hayes AIF®, CRPS®, AWMA®, CFS®, APMA®

Registered with Cambridge Investment Research, Inc., a broker-dealer with over 3,000 Registered Representatives nationwide. Investment Adviser Representative at Cambridge Investment Research Advisors, Inc., a $94B RIA based in Fairfield, IA. I've held an industry securities registration for 26 years and am subject to SEC and FINRA oversight.

Click to Call

Pin It on Pinterest

Share This