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Protecting Your Retirement Savings

Proposed rules aim to get consumers the best investment advice

loopholes in the law allow bad-actor firms to present financial “advice” based on what’s best for their pocketbook, not your


Are commissions to your financial adviser eating away at your hard-earned retirement savings?

En español l The Department of Labor is readying a new rule for financial professionals who give investment advice to workers in IRAs, 401(k)s and other workplace retirement plans.

And if all goes as expected, brokers and financial advisers will have to start providing advice that is in the investor’s best interest — not their own.

This change could end up saving Americans $17 billion a year that otherwise would be eaten up by commissions and fees, according to a recent White House memo.

Here’s what you need to know:

Q: Why is this happening?

A: The regulations that oversee investment advice in retirement plans have changed little since they were first issued in 1975 — when IRAs were fairly new and years before the first 401(k).  (Prior to that, many Americans had traditional pensions to help support them in retirement.)

Take action: Stop Wall Street from draining Americans' retirement savings

So for the past 40 years, some brokers and advisers recommending funds or securities in IRAs and workplace retirement plans have had only to make sure the investment is “suitable” for you based on, say, your risk tolerance and financial objectives. 

Q: Why is that a problem?

A: What’s “suitable” is not necessarily what’s best for you.

Take, for example, two mutual funds that fit your financial needs, or in other words, could be considered suitable. One is low-cost while the other comes with a steep sales commission and high annual fees that erode the return on your investment. Under current rules, brokers are under no obligation to recommend the first fund. Instead, they can advise you to invest in the one that makes them or their investment firm the most money.

Q: Is this costing me money?

A:  Yes, and collectively, that might be $8 billion to $17 billion each year, according to a memo from two economists on the White House Council of Economic Advisers. For a worker expecting to retire in 30 years, the loss amounts up to five years’ worth of withdrawals in retirement.

Q: What’s at stake here?

A: About $11 trillion, the amount currently invested in IRAs, 401(k)s and similar retirement plans. With the decline of traditional pensions that once handled all the investment decisions for workers, employees increasingly are forced to make critical financial choices in 401(k)s and IRAs that will determine the quality of their retirement.  

Q: Who’s advocating on my behalf?

A: For years AARP and other investor advocates have argued that the rules governing investment advice on these retirement accounts need to be strengthened to protect investors.

See also: Save our retirement

“AARP believes retirement investors need quality investment advice free from conflicts of interest,” says David Certner, AARP’s legislative policy director. “Subpar advice is now reducing retirement security by billions of dollars a year, and we support a common sense rule that holds advisers accountable and better protects the financial security of seniors.”

Last month, AARP joined a coalition of public interest groups to encourage the Labor Department to require financial advisers to act in clients’ best interests — also known as a fiduciary duty — when dispensing advice on retirement accounts.

Q: So what is the fiduciary duty exactly?

A:  Basically it means that the adviser has to do what’s best for you, not him or her. For example, registered investment advisers must adhere to this rule; people known as broker-dealers (who may also call themselves advisers) generally do not. And that’s where it gets confusing, as studies have shown most non-financial industry people are not aware there are two standards or which one applies.

Q: What kind of support is there for this change?

A: Two recent AARP surveys found that nearly 90 percent of employers and 93 percent of workers wanted the investment companies handling their workplace retirement plans to provide advice that was in the best interest of participants.

Q: Is there any opposition?

A: Representatives of the investment industry argue that changes to current rules could backfire and actually hurt investors. They say the industry is already well-regulated and that any additional burdens might dissuade advisers from serving low- to middle-income workers who need investment education. And changes to compensation could result in even higher costs for workers, who might end up forgoing needed advice altogether, they say.

Q: Has this come up before?

A: Yes, the Labor Department previously took a stab at revising the investment advice rules in 2010. That proposal went too far for Wall Street and not far enough for investor advocates. The agency went back to the drawing board.

Q: What are the next steps?

A: While it’s unknown exactly what the Labor Department may propose, the White House memo says the agency appears to be seeking a “middle ground.” Even if the agency doesn’t ban conflicted payments altogether, it will require advisers to act in investors’ best interests, the memo says.

Q: When would any change take effect?

A:  The Labor Department likely will give all sides three months to weigh in before the final rule is adopted, which would then be binding on all retirement account advisers.