The Department Of Labor Releases A New Rule To Protect Savers And Retirees
Unlike your doctor or lawyer, your financial adviser might not always be putting your interests first. But that will soon change thanks to a new rule announced by the Department of Labor. This morning, the Department of Labor released its final rule on conflicts of interest in retirement investment advice, also known as the “fiduciary rule.” It’s a confusing name for a simple idea: thanks to the new rule, all financial professionals selling retirement products will be legally required to act in the best interest of their clients rather than in their own interests.
The share of working-age families at risk of retirement insecurity is now 52 percent—up from 31 percent in 1983. The growing problem of retirement insecurity is exacerbated by the fact that most families are left to navigate retirement planning and savings on their own through 401(k)s and Individual Retirement Accounts (IRAs) instead of relying on traditional pensions, which used to cover the vast majority of Americans.
Unsurprisingly, many families turn to financial advisers for advice. A vast majority—87 percent—of people saving for retirement consider it very important or somewhat important that advisers be legally required to act in investors’ best interests. But a decades-old loophole in the Employee Retirement Income Security Act allows financial advisers to put their interests before the interests of savers and retirees. Instead of requiring financial advisers to recommend the best investments for a consumer, current law only requires financial advisers to recommend “suitable” investments that generally meet their investment objectives.
As a result, it’s currently legal for advisers to make recommendations based on what maximizes their commission instead of what’s the saver’s best fit. And often, financial advisers make much higher commissions on riskier investments, which gives them the incentive to make recommendations that may not be appropriate for a saver’s level of risk or future financial needs. An investigation from Sen. Warren’s office found that selling certain insurance products may earn advisers free vacations or other in kind kickbacks. It may not seem like paying financial planners higher fees is a problem, particularly if investments are performing well, but even a seemingly small difference in fees on your retirement account could delay your retirement by years.
The Department of Labor’s new rule will close the existing loophole and legally require investors to act in the best interest of consumers. And the impact will be significant: the new rule has the potential to return at least $17 billion a year to savers and retirees through lower fees, according to the White House Council of Economic Advisors.
Speaker Ryan already has plans to challenge the rule, calling it “Obamacare for financial planning.” But the commonsense rule enjoys support from the Financial Planning Coalition—one group representing financial advisers—as well as a broad coalition of civil rights, labor, and consumer groups and many leaders in Congress. At an event announcing the rule at the Center for American Progress this morning, Sen. Warren (D-MA) summed up its importance: “Today, the struggle to build retirement security will get just a little bit easier for millions of Americans.”
BOTTOM LINE: Saving for retirement is daunting enough without having to worry about whether or not your financial planner has your best interest in mind. The Department of Labor’s new rule is an important step to help ensure our economy grows from the middle out, not the top down.
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