At a time when mom-and-pop savers are increasingly being put in charge of their own retirement security, the rule is meant to add a new layer of protection to guard workers from poor or conflicted investment advice. The rule is supposed to improve disclosures and to reduce conflicts of interest, such as cases when a firm is paid by a mutual fund company or other third
party for recommending a particular investment.
“This is a huge win for the middle class,” said Thomas Perez, secretary of the Labor Department. “In far too many places and on far too many issues, the rules no longer work for working people.”
Proponents of the rule say it should cut back on cases of retirement savers being steered into complicated and pricey investments, leaving them with more savings in their pockets. While the new rule won’t ban commissions, brokers may have to explain why they are recommending a particular product when a less expensive option is available, and they could face scrutiny if they recommend complicated products. Conflicted investment advice costs savers $17 billion a year, according to an estimate from the White House Council of Economic Advisers.
“Hard workers need every dollar to work for them,” said Sen. Elizabeth Warren during a press event Wednesday announcing the rule.
It’s too soon to know exactly how the rule will play out, but the change could lead savers to invest more of their money in low-cost index-based funds, analysts say. Some investment firms could also lower their fees. For instance, LPL Financial said last month that it would allow savers to hold accounts with smaller balances and that it would cut the fees for some funds
by up to 30 percent.
Another potential impact of the new rules, which affect people saving in individual retirement accounts or rolling money over from a 401(k) plan to an IRA, is that retirement savers might end up switching accounts or investment firms. Some investors may have conversations with their brokers and advisers over the next several months about whether they should be moved into a different kind of account or work with a different firm altogether.
“We’re definitely going to see investors that are forced to change how they interact with the investment services industry,” says Michael Wong, an analyst focusing on brokerages and exchanges for the fund research firm Morningstar.
Some firms may decide to move investors from commission-based accounts to fee-based accounts, where an investor’s costs may be structured as a percentage of assets invested, Wong said. The move would put savers into accounts where what brokers and advisers are paid would not depend on the type of investment product they sell, he added.
Those fee-based accounts are already subject to fiduciary standards but some financial professionals have said it may raise costs for investors who rarely make trades and are more likely to hold on to investments for the long term.
For some savers, particularly those with small account balances, the new regulations could require them to take on a bigger role in how their money is managed – particularly if they lose the advisers they’re working with now. Some companies facing higher administrative costs may feel pressure to drop clients with low account balances, say below $50,000, which may no longer be as profitable with fewer commissions. Some firms may try to transfer savers into stripped-down, online-based accounts, where they may pay lower fees but also receive less personalized advice.
Members of the financial industry said Wednesday that they were still reviewing the details of the rule but expressed initial worries about how the regulations would affect their relationships with customers.
“We remain concerned that the [Department of Labor’s] rule could force significant changes to current relationships, which may leave clients without the help they need to prepare for retirement,” said Kenneth Bentsen, president and chief executive of the Securities Industry and Financial Markets Association, a trade group for broker dealers and other financial professionals.
The shift could also encourage more people to use discount brokerages or online investment accounts dubbed “robo-advisers,” which typically use algorithms to help people create portfolios, according to a Morningstar report. The online options can often be more affordable than working with a financial adviser, in part because they often using index-based investment options.
Judy Barfell, a 67-year-old retiree near Daytona Beach, Fla., was surprised to learn a few years ago that her IRA savings were invested partially in emerging market funds, high yield bonds and other risky investments. After talking to her adviser about the portfolio and doing some other research, she also realized she was paying roughly twice as much in investment fees
each year as she thought she was.
“You trust the people that you put your money with and then this happens,” she said.
Last year, Barfell moved her savings into an account with Rebalance IRA, an online based account where her advisory and investment fees add up to about 0.7 percent of her savings, down from the close to 2 percent in fees she was paying before. She said she is glad the rule will require advisers to put investors’ interest first, something she had previously assumed was required.
“You spend a lot of time in your career cutting out the money to save,” Barfell said. “It’s hard when you have your life … to put all that money aside. And then you save it and to have someone take advantage of you is really disheartening.”
The Labor Department also says educational information offered to retirement savers about types of investments would still be allowed under the new rules. But investment firms consulting savers on whether they should keep their money in a 401(k) or roll them over into an IRAwould be required to meet the new standard on any advice they offer. Financial firms would have until January 2018 to get into compliance.