Are commissions to your financial adviser eating away at your hard-earned retirement savings? — Istock
En español l The Department of Labor is readying a new rule for financial professionals who give investment advice to workers in IRAs, 401(k)s and other workplace retirement plans.
And if all goes as expected, brokers and financial advisers will have to start providing advice that is in the investor’s best interest — not their own.
This change could end up saving Americans $17 billion a year that otherwise would be eaten up by commissions and fees, according to a recent White House memo.
Here’s what you need to know:
Q: Why is this happening?
A: The regulations that oversee investment advice in retirement plans have changed little since they were first issued in 1975 — when IRAs were fairly new and years before the first 401(k). (Prior to that, many Americans had traditional pensions to help support them in retirement.)
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So for the past 40 years, some brokers and advisers recommending funds or securities in IRAs and workplace retirement plans have had only to make sure the investment is “suitable” for you based on, say, your risk tolerance and financial objectives.
2013 AARP Survey
— Click image for survey results
93% would favor requiring 401(k) and 403(b) plan providers to give advice that is in the best interest of the plan participants.
Q: Why is that a problem?
A: What’s “suitable” is not necessarily what’s best for you.
Take, for example, two mutual funds that fit your financial needs, or in other words, could be considered suitable. One is low-cost while the other comes with a steep sales commission and high annual fees that erode the return on your investment. Under current rules, brokers are under no obligation to recommend the first fund. Instead, they can advise you to invest in the one that makes them or their investment firm the most money.
Q: Is this costing me money?
A: Yes, and collectively, that might be $8 billion to $17 billion each year, according to a memo from two economists on the White House Council of Economic Advisers. For a worker expecting to retire in 30 years, the loss amounts up to five years’ worth of withdrawals in retirement.
Q: What’s at stake here?
A: About $11 trillion, the amount currently invested in IRAs, 401(k)s and similar retirement plans. With the decline of traditional pensions that once handled all the investment decisions for workers, employees increasingly are forced to make critical financial choices in 401(k)s and IRAs that will determine the quality of their retirement.
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