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401(k) Challenges

A New Day for Investors: The Fiduciary Rule Is Here

The fiduciary rule will help to ensure that financial institutions act in investors’ best interests when providing retirement advice.

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By Jon Stein
CEO & Founder, Betterment  |  Published: April 6, 2016

The Department of Labor has finalized the fiduciary rule, which significantly reforms the provision of retirement investment advice.

Betterment has long supported the rule, which imposes new requirements on recommendations for investments in 401(k)s and IRAs.

The rule’s primary opponents included financial firms whose business models depend on hidden fees.

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The U.S. Department of Labor (DOL) has now finalized its “fiduciary rule,” which is a positive development for anyone saving in a 401(k) or Individual Retirement Account (IRA).

Under the new rule, anyone who provides retirement investment advice for a fee will be considered a fiduciary. Fiduciaries are required to act in the best interests of the investors they serve.

Betterment has long been a supporter of the DOL fiduciary rule. We believe it is a step toward improving retirement outcomes for millions of Americans, because it will help eliminate problematic practices in the retirement advice industry. The rule is part of the industry’s shift toward ensuring that everyone receives unconflicted fiduciary advice.

How the Rule Impacts Investors

Many investors are unaware that their retirement account managers and advisors are currently under no obligation to act in their best interest.

Investors are also often unaware of the fees they are charged, because those fees may be hidden in the fine print. Once the new rule is implemented, investors will receive additional disclosures regarding fees, compensation, and potential conflicts of interest when they receive investment recommendations concerning their retirement accounts.

The fiduciary rule should also help prevent instances of product steering, which occurs when brokers and advisors direct clients to invest in more expensive investment products—including their own branded products—over others.

How the Rule Impacts Advisors, Brokers, and Account Managers

Opponents of the rule cited implementation costs, such as the costs to retrain advisors or update legal procedures and technologies, as a reason to not support it. They also argued that, if forced to abide by the fiduciary rule, they would no longer find it economically feasible to provide services to lower-balance accounts.

But we believe the rule’s opponents actually pushed back because they wanted to preserve an outdated status quo—one that did not always put customers first, or prioritize transparency, innovation, and unconflicted advice.

In plain speak, opponents were focused on the potential impact that the fiduciary rule would have on their bottom lines.

In our open letter to the Department of Labor, we addressed these arguments. We explained that technology allows modern, independent advisors like Betterment to provide affordable fiduciary advice to customers at every level of wealth. The fiduciary rule does not affect how Betterment manages customer assets, because we have long been committed to acting in our customers’ best interests. Our transparent pricing is our only source of revenue, which is not affected by the ETFs that we recommend in our investment portfolios.

Betterment is hard at work bringing our unconflicted, next-generation service to millions of customers. Our aim is to help investors reach their short- and long-term financial goals, and our customers can easily navigate their accounts to see if they’re on track to do so. They know where they stand, and in which accounts they’re invested, at all times.

We’re optimistic about the DOL’s rule-making and what it represents. We built Betterment as an alternative to the conflicted, sales-driven business models that previously dominated the market for retirement advice. We applaud the DOL for finalizing the fiduciary rule, and for recognizing that an unconflicted approach will create better outcomes for investors.

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