Why financial advice should put your needs first

“If the stock market falls again, I could lose everything!”

This is what a 68-year-old relative of mine recently said after she and her co-workers talked to a financial advisor about taking your money out of your 401 (k) plan and into a guaranteed annuity in an IRA. Luckily, he called me first to see if it was a good idea.

My reaction was quick – your worry about losing it all is wrong, wrong, wrong! And it made me realize, once again, how important it is “fiduciary rule” proposed by the Obama administration’s Department of Labor (DOL) and how detrimental its delay and possible decline under the Trump administration could be.

But first, why was she wrong to be so worried.

Their 401 (k) savings were invested in Vanguard’s Target Date funds, which invest more than half of their assets in bonds, not stocks. If the stock market crashes, it would probably affect less than half of your savings. In that case, your 401 (k) account could drop by as much as 25 percent, and while that’s not good news, you wouldn’t lose it all.

“Don’t let fear drive your investment decisions,” I told him.

Given your situation, buying an annuity may not be in your best interest for several reasons:

• You don’t need more guaranteed income. Between her Social Security and her husband’s pension, they have sufficient guaranteed income to cover all of their basic living expenses. They can afford to take some stock market risk with their savings to look for growth potential as protection against inflation.
• He will not take advantage of his 401 (k) savings for at least five years because he plans to continue working at his current job until he is 73 years old. This gives you time to recover from any immediate fall from the stock market.
• If you were enrolling your 401 (k) account in an IRA, you should start doing so minimum withdrawals at 70-1 / 2 years, before you need the money. If you leave your accounts in your current employer’s 401 (k) plan, you don’t need to make any withdrawals, not even a minimum, until you retire, even if you work beyond 70-1 / 2 years.
• According to Morningstar, its Vanguard funds have an expense ratio of 0.09 percent, one of the lowest in the financial sector. A lot of research shows that reducing investment spending is one of the best ways to maximize long-term investment returns.

And second, why the fiduciary rule would play an important role here.

An advisor acting as a trustee would take the time to know a client’s circumstances before making a recommendation, to make sure the advice is in the client’s best interest. This would be required by the DOL fiduciary rule, which requires advisors to act in the best interests of their clients.

This rule was expected to take effect earlier this year. However, the DOL recently announced a delay in its effective date until mid-2019, in reaction to intense pressure from some financial sector companies and a request from the Trump administration.

Retirement planning decisions become more complex large workers approaching retirement, as illustrated by the story of my relative. These are some of the reasons why the Obama administration implemented the fiduciary rule in the first place: to protect retirement savers from unscrupulous or unqualified financial advisers, some of whom are nothing more than sellers.

Given the delay in the rule and its potential dilution when it goes into effect, what can retirement savers do to protect themselves? Start by asking any potential advisor a question: “Will you act as a trustee and act in my best interest?”

If the answer is “Yes,” it’s worth your time to ask more questions about their services, such as how they are paidand what is his formation to generate retirement income. If the answer is “No”, stop the conversation politely and don’t consider that person. It’s that simple.

Fortunately, you can find reputable advisors (and financial institutions) who will be happy to act as a trustee on your behalf. Examples include Financial Engines, Garrett Planning Network, McLean Asset Management and United Income. Your job is to look for these advisors and avoid those who do not act in your best interest. It is the free market in action.

Understand the fiduciary rule and yours potential impact on your savings is an important task of retirement planning. As an investor, it’s your job to make your money work for you. In today’s world, you are the best person to act in your own self-interest.