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How new retirement savings rules will affect consumers

The new rules require retirement advisers to put clients’ interests ahead of their own when it comes to investment choices.

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The new rules require retirement advisers to put clients’ interests ahead of their own when it comes to investment choices.

There are big changes afoot in the retirement savings industry, but investors could easily miss them if they don’t pay attention.

New rules announced this month by the US Labor Department will require all retirement advisers — including brokers and insurance agents — to act as “fiduciaries.” That means they must put clients’ interests ahead of their own when it comes to investment choices for individual retirement accounts.

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One problem. “Most consumers already believe that they are being served in a fiduciary way,” said Pamela Sandy, president of the Financial Planning Association, which represents 24,000 financial planners and affiliated professionals.

Many advisers, however, have been held to a lesser standard requiring them only to make sure recommended investments are “suitable.” And that left them free to use products with backdoor payments and hidden fees.

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The government says such conflicts of interest cost investors about $17 billion a year. Under the new rules, which will be phased in starting in April 2017, advisers can still recommend expensive products, but they will have to disclose all fees and explain why the product is in the best interest of the investor.

“Clearly, there are some products that no one should be using,” said Sandy. But in most cases, she said, the issue isn’t the product, but whether it is appropriate for use in people’s retirement portfolios.

Over time, these new rules are expected to have a significant bottom-line effect on retirement accounts, but investors initially may find it hard to see what’s different. So here’s what retirement plan investors may experience as the changes are put in place over the next 18 months.

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 More paperwork. “People will definitely start seeing some additional documents, and they should read them,” said Dave O’Brien, a Virginia-based fee-only planner and chairman of the public policy committee for the National Association of Personal Financial Advisors.

Some, he said, will find that their advisers are already acting as fiduciaries. Registered investment advisers, for example, are subject to fiduciary standards, but under a different law.

Those whose advisers accept commissions and other such compensation will see more significant changes. These advisers must ask clients to sign a “best interest contract,” which requires them to act in the investor’s best interests and includes information about any conflicts of interest.

 Different investments. Instead of mutual funds with high sales fees or annuities with significant surrender charges, investors may be directed to low-cost investments such as index mutual funds or exchange traded funds.

As the new rule goes into effect, investors may be surprised to see the actual cost of investments in their portfolios, since charges may have been itemized under a variety of headings including sales fees, management fees, distribution fees, and marketing fees.

“It is hard to see fees,” explained Alicia Munnell, director of Boston College’s Center for Retirement Research. “We never really see them. We just end up with less at retirement.”

The impact of lower fees can be significant. The White House Council of Economic Advisers found that conflicts of interest and the resulting high fees cost investors about 1 percentage point a year.

Over 35 years, that 1 percentage point could reduce an investor’s retirement savings by over 25 percent. A $10,000 investment that would have otherwise grown to an inflation-adjusted $38,000 or more would grow to just over $27,500 instead, according to the council’s analysis.

 Different accounts. Because the Labor Department fiduciary rule is new, it’s unclear exactly how various types of advisers will decide to comply.

Already there is talk that some seemingly free advice may soon come with a 1 percentage point management fee. Or people with smaller accounts may find themselves steered to low-cost computer-based robo-advisers.

Some opponents of the new rule argue this will make advice too expensive for people with modest accounts. Or, they say, people may not be able to get any advice at all.

But the Financial Planning Association’s Sandy said these new fees will simply replace the fees that have been hidden in the commissions, sales fees, and internal expenses of existing investments.

“You were paying it anyway,” she said, noting that investors will now be able to see the costs and factor them into their decision making.

 Different advice on 401(k) rollovers. When it comes to retirement plans, people tend to lump their IRAs together with their workplace 401(k) plans. But they aren’t the same.

For one thing, 401(k)s are already governed by a fiduciary standard, so the accounts are better regulated when it comes to investment advice. Typically, 401(k)s offer a preset and more limited range of investment choices. Many 401(k) owners also benefit from the fact that their employers have negotiated for lower fees and other benefits from the plan provider.

“So, the IRA may not be the best vehicle for a client to use.” said fee-only planner John Konetzny with the Practical Planner, based in Groton and Maynard. “Investments at a 401(k) could be cheaper.”

Under the new rules, he said, advisers will have to discuss these potential benefits and drawbacks when making a rollover recommendation.

As such, there is likely to be a shift in marketing strategy, and fewer advisers may end up recommending that clients ditch the 401(k).

 Different standards for nonretirement accounts. While your adviser will be held to a fiduciary standard on your IRA accounts, the same doesn’t apply to your regular brokerage accounts. That can be confusing. Don’t be afraid to ask for additional information when making decisions about your taxable accounts.

The Securities and Exchange Commission has been working to develop similar protections for nonretirement investment advice. O’Brien, the Virginia-based fee-only planner, says he’s hoping that the SEC will be motivated by the Labor Department changes.

Lynn Asinof can be reached at lasinof@journalist.com.
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