A recent paper analyzes the potential effects of a proposed Department of Labor (DOL) rule that would eliminate 12b-1 fees on mutual funds held in IRA accounts. Many in the industry have criticized the rule change, arguing that eliminating these fees could reduce the amount of advice customers receive from broker-dealers. The paper found that the DOL proposal would reduce fees slightly, have virtually no effect on the business model of broker-dealers, and any reduction in access to advice, which is likely to be small, will have little effect. Given this, the authors argue that additional protections, beyond the DOL rule change, are needed in the IRA market:
“As long as accumulations are held in 401(k) plans, participants are operating in a world in which sponsors must operate as fiduciaries and fees are under a spotlight. Once they roll over their accounts into IRAs, they enter a world where suitability becomes the standard of care and broker-dealers are paid commissions that encourage the sale of high-priced mutual funds. If a fiduciary standard and attention to fees are appropriate for retirement assets when they are in the plan, such safeguards are clearly still appropriate when they are rolled over. The DOL recognizes this logic, but, with its authority limited to defining who is a fiduciary under the [tax code], has put forth a very modest proposal.”
The paper was written by the Center for Retirement Research at Boston College and is available here.