In coming months, if all goes according to plan, there will be a new government rule to protect people who save in 401(k)-type plans and IRAs from hidden fees and expenses — costs that could cause someone to lose up to five years' worth of retirement income.
That's because President Obama has directed the U.S. Department of Labor to implement a rule that would require all brokers and other financial professionals to provide advice that's in an investor's best interest — not their own.
Studies show that hidden fees and risky investments cost Americans $17 billion a year.
"There are a lot of very fine financial advisers out there, but there are also financial advisers who receive backdoor payments or hidden fees for steering people into [funds] that have high fees and low returns," Obama said at a Feb. 23 event at AARP headquarters. "The truth is, most people don't even realize that is happening."
AARP and other financial industry and advocacy groups applauded the move. "In today's world it's hard enough to save for retirement and achieve your financial goals. We don't need to make it more difficult by allowing some in the financial industry to take advantage of hardworking Americans," said AARP CEO Jo Ann Jenkins. "All advice should be in the best interest of the consumer."
Rules governing retirement investment advice have been fundamentally unchanged since 1975. The retirement landscape, though, has dramatically shifted. Back then, many workers had a traditional pension that made the investing decisions for them. Now the majority of retirement savings — more than $12 trillion — are held in IRAs and 401(k)s, where the investing burden often rests on the individual worker.
Critics of the rule change say it could hurt investors. "The new regulation could limit investor choice; cause inconsistencies, as different regulators would apply different standards to the same retirement accounts; prohibit access to investor guidance; and raise the costs of saving for retirement," said Kenneth Bentsen Jr., CEO of the Securities Industry and Financial Markets Association.
While the debate plays out, investors seeking help with their 401(k)s and IRAs need to know if their adviser is acting in their best interest. And the best way to find out now is to ask. And ask again.