If you don’t live and breathe financial services like we do, you may have missed the furor over the Department of Labor’s recent fiduciary rule regarding retirement plans and IRA accounts. Before you roll your eyes and move onto something you think is more interesting – stay with me. This is an issue that impacts your ability to retire when you want, with the income you need.
As a business owner, I am not a proponent of big government and increased regulations. We have enough rules to follow, reports to file, and taxes to pay as it is. But sometimes the argument against government regulation is used as a defense by an industry wanting to protect its own self-interest. As a member of the financial services industry, I can definitely say this is one of those times.
Last Wednesday, the U.S. Chamber of Commerce and the Securities Industry and Financial Markets Association announced that they are preparing to file a lawsuit as part of their continuing efforts to block the rule, even though it was scaled back significantly to appease earlier criticism. The American Council of Life Insurers trade group is expected to join in.
Referred to by some as the Fiduciary Rule, it is intended to force companies and individuals who manage retirement plans and IRAs to operate in the ‘best interest’ of their clients. This means if I am advising you on your company’s 401(K) plan, and I am recommending investments for your plan, I am supposed to recommend the best mutual funds for you, not those that pay me the most to recommend them. The rules apply to IRA accounts as well. It sounds simple enough, but it isn’t the way most retirement plans are managed today. And it’s one of the reasons so many people have a difficult time accumulating enough money to retire.
Over the past 30 years, companies shifted their retirement plans from pension plans that paid a fixed monthly amount (defined benefit plans) to 401(K) and profit-sharing plans that provide a retirement income that’s dependent on the amount saved and the earnings on those savings. This change made most employees responsible for saving for their retirement and determining how to invest those savings, and the earnings on those savings became a critical factor in determining what their retirement income will be someday.
At TAAG, when we review the investment options available for clients within their company retirement plans, we are sometimes shocked at the fees and charges that are imbedded in them. When people change jobs, they sometimes roll their 401(K) plans over into IRA investments that have extremely high costs as well. Many people have been convinced to roll their IRAs into variable annuities, products that have high insurance fees and administrative charges in addition to the fees imbedded in the investment options. Most people in these situations don’t know what they’re being charged, but they do know their accounts aren’t growing much.
People go to retirement seminars to learn more about the investment options in their plans. They talk to the retirement plan administrator about rolling their funds out into an IRA when they leave a company. They believe they are getting impartial financial advice, not negotiating a car purchase.
The brokerage and insurance industries have significant financial resources to throw at fighting this rule, and they have done so since it was proposed in February, 2015. I think there’s a reason why they’ve failed so far – it’s difficult to argue that it’s a bad idea to treat people fairly when you’re giving them financial advice. Registered investment advisors like TAAG, who already follow the fiduciary ‘put the client’s interests first at all times’ rule do not have the same financial clout, so we can only support the rule with education and our conduct.
As the industry continues to fight, it’s no wonder very few consumers trust people who call themselves financial advisors. To inspire trust, you must earn it with your actions.