Did you know that the financial advisors you pay to help you decide how to invest your IRA or 401(k) aren’t required to act in your best interest? That they can recommend the investment that pays them the biggest commission—and make misleading statements to you about it? Isn’t that crazy?
Fortunately, this enormous gap in consumer protection will soon be closing. Yesterday, the Department of Labor issued a proposed regulation that would generally treat people who provide investment recommendations or advice to people who have, or are the beneficiaries of, employer-sponsored retirement accounts and Individual Retirement Accounts, as fiduciaries. This means that, with some exceptions, those who provide investment advice regarding such accounts will be required to “to give advice that is in the customer’s best interest; avoid misleading statements; receive no more than reasonable compensation; and comply with applicable federal and state laws governing advice,” as the Department of Labor notice put it.
This new rule is expected to better protect consumers and beneficiaries from conflicted investment advice and unreasonable fees. This is especially important as more and more workers save for retirement in 401(k)-type plans and IRAs. More and more workers, assuming they have retirement savings plans at work, have 401(k) type plans, rather than traditional pensions. When workers change jobs (or reach the maximum amounts in the new Treasury Department-sponsored myRAs), they roll their retirement savings into IRAs. For both 401(k)-type accounts and IRAs, workers deposit money or rolled-over savings into the account, but the expectation is that the funds put into retirement savings accounts will grow, over time, through investment. The workers are the ones who have to make choices about how those savings will be invested. Most people aren’t well-positioned to make those decisions alone, and rely on investment professionals. The advice those professionals provide about investment choices can have a huge impact on workers’ retirement security. If workers aren’t directed to appropriate investments, or if their accounts are depleted through excessively high fees, their retirement savings will suffer. Lower-income workers, including women, are especially hard-hit by inappropriate investments and high fees. And a worker’s retirement savings may also have to fund the retirement of a spouse (especially if that spouse is a woman). These savings may be the worker’s, or the couple’s, only supplement to Social Security – and remember that the average Social Security benefit, for women, is just over $1,100 per month.
The stakes couldn’t be higher. As more and more workers rely on savings in 401(k) and IRA accounts to fund their retirement, increased protections against conflicted investment advice and unreasonably high fees are long overdue. Although it will take some time to digest the details in the 120 pages of regulations (fortunately, there are 75 days for public comment), the critically important bedrock principle of the proposed Department of Labor rule is clear: consumers deserve impartial investment advice to help them achieve a more secure retirement.