Massachusetts Fiduciary Rule – what it means to the financial industry
Recommending investing in a tax deferred account to receive a tax break today, may wind up landing advisors in courts tomorrow. The foundation of financial plans is traditionally anchored in amassing qualified dollars. The unintended consequence of amassing those dollars is a direct increase in the cost of Medicare, a subsequent erosion of Social Security benefits, and a plan that quickly spirals out of control.
Don’t quite understand. Don’t worry. William Galvin does.
William Galvin, the Secretary of Massachusetts, recently announced his office is looking into creating their own Fiduciary Rule.
Secretary Galvin stated that they “are proposing this standard, because the SEC has failed to provide investors with the protections they need against conflicts of interest in the financial industry, with its recent ‘Regulation Best Interest’ rule”.
Furthermore, the Massachusetts Fiduciary Rule “would apply a fiduciary conduct standard on broker-dealers, agents, investment advisors, and investment advisor representatives when dealing with their customers and clients”.
The Secretary’s Office appears to be requesting information around an oft overlooked aspect of planning – controlling (or being ignorant of) the cost of healthcare in retirement and in the face of fiduciary legislation, that may be one cost advisors cannot afford to overlook.
Under today’s federal regulations, which Secretary Galvin’s Office thoroughly understands, every retiree must accept Medicare to receive Social Security.
Further regulations state that the costs of Medicare, Parts B and D, are means tested based on income through the Income Related Monthly Adjustment Amount (IRMAA). The other, often missed regulation; the bulk of Medicare premiums are deducted automatically from any Social Security benefit received.
Ultimately, Medicare will cost more for retirees if their income happens to be higher than predetermined guidelines, thus lessening their expected Social Security benefit.
And here is where the Massachusetts fiduciary rule may meet the advisor head on:
The definition of income that Medicare applies is far reaching. Income includes wages, interest, all dividends, pension and rental income, Social Security benefits, capital gains and any distribution from any tax-deferred account (Traditional 401(k)’s and IRA’s).
The surcharges placed on Medicare Parts B and D combined with the corresponding decrease in the Social Security check from which Medicare is drawn often rapidly and dramatically exceeds the savings from the initial deferral into qualified accounts.
Here’s how it plays out when plans are geared to take advantage of tax deductions today:
- Retirees pay tax when they distribute assets from those tax-deferred accounts.
That income from the distribution is added to their Social Security, interest, dividends, pensions, rental income, and capital gains driving up their overall income to a point where they are surcharged by IRMAA.
- Medicare, the cost of which is now inflated by the good work of the advisor deferring money into the qualified assets, begins consuming the retiree’s Social Security benefit until ultimately the retiree pays taxes on a Social Security benefit they never see hit their bank account.
Any financial plan that does not account for Medicare premiums increasing throughout retirement and financial plan that does not account for a reduction in Social Security benefits as result of IRMAA surcharges may be in violation of the new fiduciary law of the State of Massachusetts.
Many financial plans pay lip service to healthcare costs often laying out IRMAA while failing to adjust throughout the plan or adopt the appropriate inflation percentages. The argument that can be taken by Secretary Galvin can be simple: if the financial plan considers the cost of healthcare in retirement then the financial professional is responsible for understanding the cost of healthcare. Sounds reasonable enough.
For those that plans that do not adequately detail healthcare costs or those costs all, well the case can be made that the financial professional responsible for creating that plan neglected to consider the one expense that is mandated by federal law.
If the state of Massachusetts proceeds to further other states will now have a blueprint as to how to hold the financial industry responsible for not placing their clients first.
It is only a matter of time before investors who heeded the advice of tax-deferral today see their income increase to where IRMAA impacts them and their Social Security benefit decreases exponentially. At that point every state will be forced to act.