The announcement by the Labor Department Wednesday that it will require retirement-money professionals to act in the best interests of their clients prompted many people to ask the same question: You mean they weren’t already? Well, they didn’t have to, which led to a $17 billion problem that should have been solved long ago. That’s how much the government estimates consumers have been paying annually in unwarranted commission fees that are buried in retirement accounts, virtually invisible to anyone who isn’t a financial expert. The new regulations — scheduled to be phased in starting next April — mark a fundamental change in the way retirement advice is dispensed, and will benefit millions of Americans, who collectively hold about $14 trillion in retirement savings. The revisions also could have a broader impact by promoting more disclosure throughout the financial industry — in other words, greater transparency in a business known for being impenetrable. “Most people have no idea of what they’re getting, and they certainly have no idea of what they’re paying for,” said Michael D. McNiven, managing director at Cumberland Advisors in Sarasota, Fla. McNiven likened the new rules’ importance to the 1974 Employee Retirement Income Security Act, which set special protections for retirement funds.
As with anything that invokes the phrase “fiduciary responsibility,” the revamped regulations involve a thick pile of details that don’t easily translate into English. The overarching intent is a noble one: to ensure that brokers and financial specialists who advise investors on tax-deferred individual retirement accounts and 401(k) rollovers don’t steer money to funds that pay higher commissions, give advisers perks like free vacations, and carry unnecessarily high risks. It accomplishes that, in part, by requiring them to reveal more information about commissions and potential conflicts of interest. That’s likely to make commission-based advice less attractive and increase the popularity of arrangements that pay advisers straight fees tied to the cumulative value of the portfolios they manage. Such advice works to the advantage of most small investors — it motivates advisers to grow their clients’ balances. The new rules also could boost so-called robo-advisers — services that use computer algorithms to balance investment mixes. They’re cheaper than consulting with a human, and often just as effective.
In their advertising, investment firms and independent brokers portray themselves as unfailingly trustworthy, focused solely on securing the best possible returns for customers. But, amazingly, they have not been legally obligated to adhere to that righteous standard. Under the existing regulations, an adviser only has to recommend “suitable” investments. US Labor Secretary Thomas Perez said the new rules mean that “putting the clients first is no longer a marketing slogan. It’s now the law.”
Not quite. Bowing to intense lobbying by the financial industry, a proposed eight-month rollout of the rules was unfortunately elongated, with full compliance delayed until 2018. There were other concessions, too — for instance, advisers who work for mutual fund companies will be permitted to promote their own firms’ offerings.
Still, the changes represent a major victory for workers and retirees, especially those in the middle class. With company pensions becoming a rarity, and the long-term viability of Social Security in question, more and more people are counting on IRAs and 401(k)s to provide them some semblance of stability. At the least, the new rules will make it easier for them to determine whether the numbers add up.