Posted by Alexander Sayour.
Retirement is a thought that many hardworking Americans seek towards saving up for during the latter years in life. Barring some rare instances, the path to retirement involves saving up enough money to live comfortably which has grown to be much harder in today’s times. A common way of doing so has been to invest for retirement with the help of financial professionals with either simply individual accounts or with 401k’s. There has always been much discussion over how these professionals invest retirees money and finally the Labor Department has stepped in to clear up any grey areas. This action by the government will shift the emphasis of retirement funds into lower-cost investments.
“The marketing material that I see from many firms is ‘We put our customers first’” Thomas E. Perez, the Security of Labor, said in an interview. “This is no longer a marketing slogan. It’s the law.”
These new effects won’t take effect until at least next spring and may be challenged in court, but it is definitely at least an attempt at tackling this ongoing debate of money management. This is not to say that financial professionals are doing anything wrong; it is just to prevent the chances of there being more self-driven choices in investing. For example, professionals are required to recommend only suitable investments but they may influence a more expensive mutual fund that would pay them much higher commission. The Obama Administration tackled this notion with extensive academic research estimating the conflict of interest cost Americans about $17 billion last year which led to annual returns that are 1% lower. An important part of going after the conflict of interest is that it could impact the financial industry as a whole and accentuate compliance to the rules put forth by the government.
The only problem with this new obligation is that it could impact investors greatly, especially considering commissions would be limited with a push to flat annual fees for managing accounts. Jules Gaudreau, the president of the National Association of Insurance and Financial Advisors, was pleased with some of the changes but has some fears about them as well. She said “We remain concerned that the costs to implement such a rule will result in higher costs and reduced access to advice, service, and products for retirement savers.”
Investors will be protected when rolling over a 401k to an IRA because it is just considered one-time advice given, in addition to performance disclosures not being mandated because it is hard to justify projections being made. All in all, there was $7.3 trillion in individual retirement accounts and $6.7 trillion held in 401k plans at the end of 2015, according to the Investment Company Institute, so this is definitely a monumental issue that is going to take time to address and tweak over several years if not decades.
Alexander is an accounting major at the Feliciano School of Business, Montclair State University, Class of 2017.