Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

How The Department Of Labor’s New Fiduciary Rule Hurts Workers

For those unaware, the U.S. Department of Labor is finalizing a hotly debated regulation to redefine who is a fiduciary under the Employee Retirement Income Security Act of 1974.

The proposed fiduciary standard would change the ways many advisors work with individuals to plan their retirement investments. These proposed rules are meant to minimize the investment risk that has slowly been transferred from companies to employees as retirement plans have largely shifted from pensions to 401(k)s.

While the Department of Labor's intentions are in the right place, both Congress and the financial services industry are pushing against the proposed changes as costing more than they're saving. I'm glad this topic is getting attention, but I don't believe new regulations are necessary at this stage.

Evolving Retirement Plans

Until the past 20 to 25 years, most people had a defined benefit pension plan put in place by their employers to supplement Social Security income, which barely provides a livable wage to retirees. This defined benefit is a monthly, guaranteed income sponsored by the employer in most cases for as long as the employee and his or her spouse lives.

Pension plans have been phased out by employers as a cost-saving measure during the volatile market that followed the bursting of the tech bubble in 2000 and the subsequent housing bubble in 2007. Increasingly, pensions have been replaced by 401(k) plans, which transfer the risk for investment results to the individual employee, who is often unequipped to manage that risk.

Some financial advisors accept commissions when they recommend certain products or services to be part of clients' retirement portfolios. This has caused some financial advisors to look out for their own best interests rather than those of their clients. This has led the Labor Department to believe that some people are being taken advantage of because they are uneducated about the expenses associated with retirement products and services. As a result, the department has concluded that many Americans approaching retirement will have less accumulated wealth to live on than they otherwise would have if their advisors had recommended different products or services.

The intent of the proposed regulations is to remedy this situation at a cost of nearly $4 billion to those firms offering these products and services. This cost will ultimately be passed on to the general public in the form of increased fees.

Difficulties in Investments

Under the proposed rules, people will find it much more complicated to invest in retirement products. The U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority already require many of the Department of Labor's newly proposed disclosures. While some of the SEC and FINRA rules don't subject a financial advisor to a fiduciary standard like the one proposed, they do require documentation of recommendations made to clients to ensure those recommendations are suitable for the clients' goals.

The fiduciary standard basically says that advisors must put their clients' interests before their own. Accordingly, the advisor must act in the best interest of the client and make full and fair disclosure of all material facts, particularly when the advisor's financial interest may conflict with the client's.

Financial firms will face significant costs to comply with these new regulations in multiple areas:

• Increased and duplicative disclosures and contracts: Before working with a financial advisor on options for a retirement plan, many more disclosures and contracts will be required, although most firms already provide disclosures and require advisors to submit suitability reports to document recommendations.

• Confusing the rules: The department's proposed rules are fractured, applying differently to different products and services. This will inevitably confuse retirement investors, advisors, and financial institutions. Instead of enabling employees to access savvy investment advice, these rules seem destined to bury investment firms and clients in paperwork.

• Limiting annuities: Annuities provide a guaranteed lifetime income, similar to pension plans. However, annuities sometimes cost more upfront than mutual funds. If the Department of Labor decides annuities' upfront costs are prohibitively expensive, this may limit the client's ability to utilize such options. Both the financial services industry and Congress are asking the department to ensure the final regulation retains access to lifetime income options for investors. All guarantees are based on the claims-paying ability of the issuer, and annuities may not be suitable for all investors.

• Securing your financial future: Regardless of whether the regulation goes into effect, more individuals need to engage with financial advisors in some capacity. When I consult with clients on their 401(k) plans, I offer employee education in groups and one-on-one sessions. Sadly, most employees won't take advantage - either not attending a seminar or declining to ask questions, thereby neglecting the opportunity for a personalized plan.

This basic five-step investment plan will help anyone searching for guidance:

Step One: Start with your goals: Write them down and quantify them to the extent possible.

Step Two: Know yourself as an investor, including your risk tolerance. Understand the unique role risk plays in helping you build wealth over time.

Step Three: Meet with a financial advisor to learn the components of a balanced, diversified strategy - one that can help smooth out the bumps when it comes to investing.

Step Four: Start saving early: You need to give your investment plan time to work.

Step Five: Build momentum via various strategies to achieve your goals. Compounding and reinvestment are two strategies to help speed your way to your investment goals.

Minimizing expenses is an important part of reaching those goals, but a plan devised with a qualified advisor's guidance is well worth that expenditure.

While I appreciate the Labor Department's willingness to tackle these issues, this fiduciary rule isn't the solution. The SEC and FINRA, which require documentation of suitability and disclosure of expenses, already regulate the investment industry. Employers are becoming increasingly familiar with their own fiduciary responsibilities to employees and savvier when it comes to plans' fees and expenses.

In my view, adding layers of paperwork to the process will only make retirement more financially difficult for hardworking Americans. The focus should be on how the financial industry can provide solutions to improve clients' retirement outcomes through cost-effective tools and education. Employers can help their workers achieve improved retirement outcomes by working with an advisor and a firm that can help employees focus on how much they'll need in savings to replace 70 to 80 percent of their preretirement incomes.