A person could be forgiven for thinking that when she sits down with someone to get help with her 401(k) that the person doing the helping is actually, well, helping. Unfortunately that isn’t always the case. But now, thanks to a new rule from the Department of Labor, working people can rest a little easier.
The new rule, issued April 6, provides an additional layer of protection to retirement savings by addressing conflicts of interest that occur between consumers and advisers. It has updated the definition of “fiduciary investment advice” under the Employee Retirement Income Security Act, ensuring that any adviser receiving compensation for providing personalized advice has a fiduciary duty to do so in the best interest of the client. The Labor Department estimates that these conflicts cost savers up to $17 billion a year.
Until now, a broker’s advice may have been influenced by fees and commissions, not to mention a push by the firm to sell certain items and bring in profits. And the broker was only required to offer a “suitable” investment with no regard for the size of the commission, which could have ranged from 1 to 10 percent.
“Under current rules, advisers say things like ‘we put our clients first.’ This is no longer a slogan. It’s the law,” said Department of Labor Secretary Tom Perez via NPR.
Nevertheless, opposition has already begun, from the financial industry as well as Congress. House Speaker Paul Ryan called it “Obamacare for financial planning” and is promising to hold up the rule by way of congressional action, said NPR. Many in the industry claim it will raise costs and make it harder to work with investors with low-balance accounts.
But Bartlett Naylor, a financial policy expert for Public Citizen, a consumer advocacy group, pushed back on that, said NPR.
"Wall Street has argued that the hidden fees and commissions are necessary to serve lower-income investors. In effect, they're saying, 'If we can't scam them a little, we'll ignore them altogether.' This deceptive mentality is exactly why a new rule is needed," Naylor said.
The Labor Department likened the new requirement to that of doctors and lawyers, other professionals with a sworn commitment to act in the best interest of their patient or client.
“This gives our members more investment protection,” said International President Lonnie R. Stephenson. “And it couldn’t be more important than in retirement. We owe this much to our seniors and working families.”
With so many employers moving away from defined benefit plans, like pensions, to defined contribution plans like 401(k)s and IRAs, more and more people are looking to financial advisers for guidance on how to make sure they have enough savings for retirement.
The IBEW has been lobbying for this change and has signed on to letters of support.
“Today’s conflict of interest rule is the kind of change people want and expect in Washington,” said Sen. Elizabeth Warren in a tweet.
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