Have you noticed how much your 401(k) plan has grown over the years? There’s now nearly $11 trillion in these retirement plans — boosted by years of continuous investing in a bull market and by employer matching contributions.
And now as baby boomers retire, more than $1 trillion every year is “up for grabs” as 401(k) plan participants decide to roll over that money to continue to grow tax-deferred. That torrent of money seeking a new home has generated a boom in rollover advice, laden with fees and self-serving recommendations. Unsophisticated employees are an easy mark as they try to figure out what to do with their retirement savings.
That’s why the Department of Labor, which regulates retirement savings, has issued a new fiduciary rule — one that covers advice given not only within the plan to participants, but also taking direct aim at the rollover market.
Starting this fall, any rollover advice must be done on a fully disclosed, fiduciary basis and in the best interests of the client. More specifically, it mandates that products carrying “invisible” commissions or annual management costs must become transparent — and demonstrably in the client’s best interest.
The financial services industry is fighting back against the new fiduciary rule because there’s so much money at stake. Morningstar estimates plan participants can save $55 billion over the next 10 years in fees inside the plans, and investors rolling over into annuity products could save another $32.5 billion over the same period.
The fiduciary rule will specifically impact the insurance industry — which has been marketing products such as index-linked annuities. The pitch for this product lulls the buyer into a sense that he or she can get both stock market growth and protection against loss. But these products really do is line the pockets of the salesman with huge commissions built into the product. And the fine print on these indexes limits the upside growth.
According to the federal government’s Council of Economic Advisers, “sales of just one investment product — fixed index annuities — suggests that conflicted advice could cost savers up to $5 billion per year.”
It does make sense to look into a rollover — a direct, tax-free move to a plan that presumably could offer safer and more diversified investment options than company 401(k) plans, which are designed to accumulate assets over an employee’s working years. But look before you leap! The fiduciary rule will give you the information you need to make a good decision for your rollover.
The impact of the new rule
The new fiduciary rule sets strict instructions for anyone offering advice on a roll-over — even though this money is actually moving out of the workplace plan. For starters, it requires anyone giving advice to put the client’s best interest ahead of their own.
And it puts a new responsibility — and financial burden — on employers, as well as the advice industry, to give employees the education they need to make good choices, as well as to make sure the plan investment choices don’t carry huge management fees.
Also, The new rule adds a higher level of scrutiny on rollovers, by requiring proof that the adviser clearly disclosed all conflicts such as hidden costs and commissions, and acted in the retiree’s best interests.
Will it work?
The real issue is how this rule can possibly be enforced. Pam Krueger, who created Wealthramp.com to match investors with fee-only fiduciary advisers, says enforcement will be difficult. “It’s like pinky-swearing” she says.
Krueger says the real value of this new rule is that it should make individuals aware of the magnitude of these conflicts when they seek advice. She warns: “If the Labor Department is going to all this trouble to force the industry to act as a fiduciary, it’s a reminder that consumers must keep their eyes wide open.”
In that regard, Krueger wants everyone to ask these three questions before signing on for advice:
Are you a fiduciary — and will you put that in writing?
How are you compensated — overall, and on each specific product you recommend?
How much — in dollars — am I paying each year for this product or service, as well as your advice?
A true fiduciary will readily put all of that in writing. The salesperson who says, “My company doesn’t allow that,” is certainly hiding costs you don’t want to pay. And that’s The Savage Truth.
(Terry Savage is a registered investment adviser and the author of four best-selling books, including “The Savage Truth on Money.” Terry responds to questions on her blog at TerrySavage.com.)
