There’s a discussion going on that is vital to the retirement money you’ve worked so hard to save.
The Labor Department, directed by the Obama administration, is proposing that more advisers, when giving retirement investment advice, put their clients’ best interests first.
You’re probably thinking what I thought after learning about this: Wait, these advisers aren’t already required to recommend investment products that are in my best interests?
Turns out, not all of them. The difference between who is required to follow that standard and who isn’t comes down to language.
An investment adviser who has a “fiduciary duty” must act in the best interests of clients. A broker-dealer is a firm or individual licensed to sell individual securities. These brokers and other investment professionals who are not fiduciaries don’t have to act in a client’s best interests. Instead, the law says they have to make sure their advice is “suitable” for the client.
Let’s say a firm has a mutual fund it wants its advisers to sell. The advisers may be offered bonuses for getting people to invest in the fund, which might carry higher fees than otherwise similar products.
The advisers profit by steering clients to the more expensive investment. The clients’ best interests may not be served because they’ve paid more than necessary. And oftentimes customers are unaware of these backdoor incentives. Either they aren’t told or the disclosure is buried in fine print.
So how much is this conflict-of-interest advice costing investors?
A lot: $17 billion a year, according to the White House Council of Economic Advisers.
There are, of course, many retirement advisers who put their clients’ best interest first, regardless of whether they technically fall under the fiduciary standard. But there is growing concern that investors, many of whom may be retiring soon, will be heavily solicited to roll money out of lower-cost workplace plans and into higher-cost investment products.
Many in the financial industry are apoplectic about the proposed change. They’re fussing about the regulatory cost of implementing it. They argue it would increase the expense of giving advice. They also say that advisers wouldn’t earn enough to want to serve small investors.
“We believe the rule as drafted will reduce choice and increase cost, and individual savers will have a more complex and confusing landscape,” Kenneth Bentsen, president and chief executive of the Securities Industry and Financial Markets Association, testified recently.
Meanwhile, seven groups — AARP, AFL-CIO, AFSCME, Americans for Financial Reform, Better Markets, the Consumer Federation of America and the Pension Rights Center — advocate a rule change at SaveOurRetirement.com.
“AARP is concerned about IRA investors who are closer to retirement and may be more vulnerable to the negative impact of conflicted advice, because the assets they have to invest are larger,” wrote David Certner, the group’s legislative counsel. “They are making significant and often one-time decisions to move retirement savings from more protected employer-based plans into significantly less-protected IRAs.”
There’s a lot of pressure on the administration to delay any rulemaking. But Labor Secretary Thomas Perez said it’s not a question of if but when.
“We have suggestions on how to make it better,” Perez told me. “I was concerned if I was going to hurt the people I want to help. And the answer is ‘Hell no.’ ”
I didn’t expect such saltiness from Perez, but he should be salty. This is the right thing to do. At stake are billions of dollars in retirement funds — $7.3 trillion invested in IRAs and more than $4 trillion in 401(k)s, according to Labor Department officials.
The rules on the books now make for an uneven playing field for many of today’s investors, many of whom are overwhelmed by the options and could use some professional guidance. We need to ensure that people are getting the best advice possible to manage their savings, especially when it’s probably all they’ll have to lean on in retirement.
“This is not just an issue for people about to retire,” Perez told me. “It’s an issue for younger folks, too. We now live in a world where consumers have to make really important choices, and the basic premise of this rule is that when someone is giving you advice, they ought to look out for your best interest.”
Get informed. Weigh in on what you think and relay your experiences. Perez says he wants to hear from you. E-mail your comments to e-ORI@dol.gov and include “RIN 1210-AB32” in the subject line. The department is still soliciting comments. The next comment period will close Sept. 24.
I’ll be writing more on the issue, so let me know what you think, too.
Write Singletary at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071 or email@example.com.