The U.S. Department of Labor recently proposed legislation that would require professionals who receive a payment to advise people on their retirement savings that they act as “trustees.” This means that advisors must put the financial interests of their clients above the adviser’s own interests when making recommendations. The proposals would apply to those offering advice on 401 (k) and IRA plans.
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The aim is to increase the protection of consumers and the different professionals who manage savings for retirement, while reducing excessive transaction and investment management fees that lead to lower returns. The Department of Labor estimates that savings could range from $ 210,000 to $ 430 billion over the next 10 years, in addition to directly adding to people’s retirement savings.
The new proposals, however, are receiving a lot of rejection from the financial sector, including the Financial Industry Regulatory Authority and the Financial Securities and Markets Industry Association. Some financial industry executives say the intent of the proposals may be laudable, but the specific requirements are not viable and will increase the administrative and compliance costs that will eventually be transferred to investors. Access to investment products and services for middle-income investors can also be reduced, they say.
On the other hand, some consumer advocates and professional groups support the proposals. In addition, Merrill Lynch CEO has publicly urged the financial sector to work with the Department of Labor on the proposed rules. And the large advisory firm Financial Engines has publicly applauded the department’s effort to promote non-conflicting investment advice.
There is also evidence that investors are confused about whether their financial advisor is a trustee. One study shows that four out of five investors believe their advisor is a trustee or acts in their best interest. Obviously, the Department of Labor thinks otherwise.
So what does this mean for people who save for retirement? Proposals are another strong message that says it is critical to optimize the returns on your investment and minimize your investment costs. By doing so, you will accumulate thousands of dollars more when you retire.
Some representatives of the financial sector say that education and outreach are all that is needed to prevent some of the worst abuses. In this spirit, we review some of the abuses that the proposals of the Department of Labor are aimed at that you want to avoid:
- Some advisors may try to persuade you to transfer your 401 (k) to your IRA, even if your 401 (k) plan has better-performing funds at lower costs. When you complete the work, you will want to carefully compare the return on investment and fund costs of your 401 (k) plan with possible IRA renewals. The performance of your 401 (k) plan and the rate disclosure statement helps you make that comparison. Your former employer’s 401 (k) plan may be the best place to leave your savings.
- Some annual products have high commissions and / or severe withdrawal restrictions. Make sure you understand when you can withdraw your money, the penalties that may apply, and the amount you are paying for the product. Ask how much commission could be paid with your investment and if there are lower cost products available.
- Some investment products have high frontal charges, 12B-1 commissions, or high ongoing investment management expenses. Annual investment management fees well in excess of 1 percent (100 basis points) should be a red flag. Ask for any fees you may be paying.
Of course, many insurance and investment products are priced right, and many advisors put the interests of their clients first. Your job is to dedicate the time and effort to finding them.
Conclusion: When it comes to the security of your retirement, beware of the buyer. While federal rules and regulations may provide some protection, but you are the best person to put your interests first.
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- 401k
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