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New White House rules help promote retirement security, but you should still beware

Written by Diane Archer

Earlier this month, the U.S. Labor Department finalized rules for financial advisers regarding retirement investments, which are intended to promote retirement security in America. The rules impose a fiduciary duty on investment advisers towards their clients’ retirement accounts and help ensure that retirement advice serves the best interests of people. But, you should still beware of advice from financial advisers.

Shockingly, the old rules permitted advisers to recommend retirement investments that served their financial interests  even when the investments may not have been in the best interest of their clients. Financial advisers have been able to steer clients rolling over their 401(k) accounts to retirement products for which the advisers were paid to promote the products.

The White House study of the issue determined that Americans lose up to $17 billion a year from conflicted retirement advice, “tens of thousands of dollars” a household. In particular, middle and working class Americans see an average loss of one percent in returns on retirement savings each year resulting from the conflicted advice their financial advisers provide them. Now, most advisers will need to meet a fiduciary standard, putting their clients’ interests ahead of their own and can be sued if they do not.

However, even once these new rules take effect, financial advisers still can receive commissions from the companies whose investment products they promote, creating a conflict of interest. To address this conflict, they must simply disclose their financial interest to their clients.

The White House analysis suggests that a worker who moves 401(k) funds into an IRA at age 45 typically loses about 17 percent in income in that account over the next 20 years because of conflicted advice. Put differently, $100,000 in retirement savings at age 45 only grows to an average of $179,000 over 20 years because of conflicted advice; with the new rules in place, it would grow to an estimated $216,000, $37,000 more.

The rule is a long time coming because of massive opposition from the financial industry and from some members in Congress, including House Speaker Paul Ryan. Arguments against the rule suggest that it will hurt the financial industry and access to “expert” advice for people with fewer assets. Of course, if the advice is not in people’s financial interest, it’s likely to have negative value.

As Labor Secretary Thomas Perez said to opponents of the new rule, “Are you for consumers, putting their best interests first, or do you think that the only way financial advisers can provide advice is to put their financial interests first?” The Consumer Federation of America considers this a big win for consumers.

The new rules do not go fully into effect until 2018. But most people pay too high fees for financial products, even if their adviser is not conflicted. So, even when the rules go into effect, it’s wise to invest in index funds as well as to ask any prospective financial advisers if their personal income depends on the decisions you make about your investments. If the answer is yes, the prospective adviser is conflicted and getting commissions from the retirement investment advice you receive.
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