One of the biggest investment decisions American workers will make is where to put their retirement savings. Many of us have little investment savvy, so we depend on advice from financial professionals.
But did you know that such professionals aren’t required to provide advice that’s necessarily in your best interest? Other types of investor-adviser relationships must meet a fiduciary standard. No such standard is in place for Individual Retirement Accounts. No such protection is required by law for workers seeking to rollover their 401(k) accounts.
The law that covers retirement accounts was enacted in 1975 – before Congress even authorized 401(k) retirement plans in tax law. Forty years ago, few Americans had to make such big retirement investment decisions on their own. Back when the law was enacted, more of us had pensions, which paid a fixed benefit.
The U.S. Department of Labor has proposed a rule that seems simple from the consumer/retiree/investor perspective: Investment advisers must must put their clients’ best interests before their own for retirement investments, too.
$17 billion loss
In testimony earlier this month to a U.S. House committee, U.S. Labor Secretary Thomas Perez talked about the necessity of providing retirement investor protection: “Most Americans do not have room for error and cannot afford to invest in products with unnecessarily high fees or low returns that benefit their advisers but do not meet their own needs.”
The Council of Economic Advisers has reported that Americans lose about $17 billion annually because of conflicted advice on Individual Retirement Account investments. Here’s the complicated part: The Labor Department first proposed to update the rule to “best interest” in 2010. But the investment industry objected so strenuously that the rule was shelved.
The latest version was drafted with extensive public and industry input, and in consultation with the Securities and Exchange Commission, Perez told The Gazette editorial board in a phone interview.
The department is still soliciting comments, and has scheduled a public hearing for Aug. 10. After that, it will continue seeking public comment for another month or longer.
Some members of Congress remain skeptical, including U.S. Sen. Jon Tester, D-Mont., who serves on the Senate Banking Committee. Tester told the editorial board that he is concerned that the rule could shut out small savers with less than $100,000 in retirement funds because no adviser would be willing to serve them if the “best interest” standard is required. Tester also believes that the SEC, not the Labor Department is the appropriate agency to regulate this investment advice.
Pam Banks, a senior policy adviser with Consumers Union, says the Employee Retirement and Income Security Act gives the Labor Department – not the SEC — jurisdiction over retirement account advice. Consumers Union supports the proposed rule.
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“I think the Department of Labor is doing everything it can to get a workable rule,” said Banks, who is a tax attorney with experience in the public and private sectors.
Folks who have less to invest need more protection because they can’t afford to lose the money they need to live on for the rest of their lives.
Importantly, the draft rule wouldn’t prevent financial advisers from earning commissions or other payments for their services. But it would require them to disclose commissions to their clients. Banks said the proposal would prohibit quotas, such as advisers having to sell a certain amount of products to get their bonus.
Critics of the rule say it would open the door to lawsuits against advisers. Such criticism ignores the fact the SEC already holds financial advisers to the fiduciary “best interest” standard for other investors.
Outliving your money
A recent survey by Consumer Reports found that 43 percent of respondents nearing retirement fear they will outlive their money. Writing in the July issue of Consumer Reports Money Adviser, senior editor Tobie Stanger cited the Council of Economic Advisers report, which found retirees could lose about 12 percent of their savings to investment fees and commissions – when they work with financial advisers that have conflicts of interest.
Retirees who draw down their investments over 30 years would run out of money five years sooner with the average estimated losses from conflicted investment advisers.
A worthwhile consumer protection rule should discourage bad advisers. At the same time, it should encourage the financial advisers who already are working in their clients’ best interests to continue their good service.
The retirement advice rule can still be revised, and no rule will be in place before next year at the soonest. Perez has said the slow pace of rulemaking will allow the department to get it right.
Millions of Americans are depending on that commitment to help them hold retirement investment advisers accountable.
We call on Tester, as a member of the banking committee, to support the proposed fiduciary rule. It may need some revision, but its basic purpose must be kept intact: Financial advisers should be accountable for acting in the best interests of American workers and retirees.
Note: This updated version reflects a change made to the title of Thomas Perez. He is the Secretary of Labor. The previous version was incorrect.