Starting today, working people could see a 35% increase in the value of their 401(k)s and individual retirement accounts over a career. That is because new protections, designed to ensure the retirement savings system truly works for working people and retirees, begin to take effect.
Under this new pro-saver rule, known as the "fiduciary rule," a paid adviser who gives investment advice on your individual retirement accounts has to act in your best interests, charge reasonable fees and avoid making misleading statements. The change applies only to investment advice for retirement accounts like 401(k) plans and IRAs; for non-retirement accounts and government employee retirement plans, the old rules still apply.
Like most people, you probably assumed the law already required financial advisers to put their clients' best interests first. While registered investment advisers have been required to do this, other investment professionals, like stock brokers and insurance agents, have been exploiting legal loopholes that have allowed them to recommend investments with the largest kickbacks or commissions, as long as the investments were generally "suitable" for their clients.
These financial conflicts of interest take a huge bite out of your retirement savings because you end up with investments that cost more and generate lower returns than investments that are in your best interests. Conversely, eliminating your adviser’s conflicts of interest can create big gains. You will earn bigger net of fees returns that could add 35% more to your accounts over 35 years of investing.
While the good news is those loopholes close today, there is some bad news, too.
Some of the new protections—most importantly, the provisions making the best interest standard for advice on IRAs legally enforceable by you—do not take effect until Jan. 1, 2018. Wall Street lobbyists are pushing hard to stop that from happening, and President Donald Trump has directed Labor Secretary Alexander Acosta to "reconsider" the rule. The new Department of Labor may try to rescind retirement savers' 35% raise by stopping these protections from ever going into effect. It is important to let your U.S. representative and senators know you want all of the protections of the new rule.
If you would like to find out more about what these new protections will do for you, check out the latest guidance for retirement investors from Barbara Roper of the Consumer Federation of America.