The U.S. Department of Labor has released a proposed rule that will protect 401(k) and IRA investors by mitigating the effect of conflicts of interest in the retirement investment marketplace. A White House Council of Economic Advisors analysis found that these conflicts of interest result in annual losses of about 1 percentage point for affected investors — or about $17 billion per year in total.
Retirement advisors–including brokers, registered investment advisors (RIAs), bankers, insurance agents and lawyers among others- will be required to put their clients’ best interests before their own profits. Those who wish to receive payments from companies selling products they recommend and forms of compensation that create conflicts of interest will need to rely on one of several proposed prohibited transaction exemptions.
«This boils down to a very simple concept: if someone is paid to give you retirement investment advice, that person should be working in your best interest,» said Secretary of Labor Thomas E. Perez. «As commonsense as this may be, laws to protect consumers and ensure that financial advisors are giving the best advice in a complex market have not kept pace. Our proposed rule would change that. Under the proposed rule, retirement advisors can be paid in various ways, as long as they are willing to put their customers’ best interest first.»
The proposal would expand the number of persons who are subject to fiduciary best interest standards when they provide retirement investment advice and would require enter into a contract with their customers in which they commit to fundamental standards of impartial conduct. These include giving advice that is in the customer’s best interest and making truthful statements about investments and their compensation.
The landscape has dramatically changed in the last 40 years. The share of working Americans covered by traditional pension plans— which offer a guaranteed income stream in retirement— has fallen sharply. Today, most workers participating in a retirement plan at work are covered by a defined contribution plan, such as a 401(k). Importantly, the income available in retirement from a defined contribution plan depends on both the amount initially saved and the return on those savings. Collectively, more than 40 million American families have savings of more than $7 trillion in Individual Retirement Accounts (IRAs). More than 75 million families have an employer-based retirement plan; own an IRA, or both.