Pros and Cons of Obama Administration’s Proposed Retirement Planning Changes
A new proposal by the Obama Administration is taking unprecedented steps toward protecting people who are planning for retirement.
President Obama is directing his administration to move forward with a proposed rulemaking that will protect families by imposing a “fiduciary standard” on retirement advisors. The fiduciary standard ensures that advisors put the interest of average Americans ahead of their own profits.
There are many different kinds of professionals who offer advice on retirement finances.
- Some of these professionals take on “fiduciary responsibility.” This means that the advisor acts in the best interest of the client above all other criteria.
- Other advisors — mostly investment and insurance brokers — balance the needs of their clients with their own interests or experiences.
“In the case of 401(k) plans and other retirement accounts, fiduciaries are tasked with acting in the best interests of the plan participants,” says Kim Saunders, executive editor with the Tax & Accounting business of Thomson Reuters. “In the past, there has been a more [narrow criteria] to determine if an advisor rendering investment advice for a fee meets the definition of a fiduciary that generally excluded brokers.”
The proposed rule would raise the status of an investment broker to that of a fiduciary.
Essentially, the fiduciary standard would mandate that financial advisors have to put the interests of their clients ahead of their own interests by recommending the best product — even if that means taking a smaller fee for their services.
The proposed rule would also prevent brokers from taking into account the fees they receive for investment advice when assisting with selecting investments for 401(k) plans and other retirement accounts, Saunders says.
It sounds like a good thing, but there are two sides to the new proposed rules.
The Benefits of Fiduciary Standards for Retirement Planning
The fiduciary standard offers retirement planning clients peace of mind. It may also mean improved returns on investments.
The proposed new rule mainly targets the cases where conflicts of interest can arise, resulting in investments being chosen that are not necessarily the best choice for participants, but result in the greatest revenue for the broker. These conflicts can impact middle-class families’ retirement savings.
Conflicts of interest likely lead, on average, to 1 percentage point lower annual returns on the retirement savings of middle-class families, according to a recent report by the White House Council of Economic Advisers (CEA). In addition, conflicts of interest are cited as leading to $17 billion of losses every year for working and middle class families.
For example, a typical worker who receives conflicted advice when rolling over a 401(k) balance to an IRA at age 45 will lose an estimated 17% from her account by age 65.
“In other words, if a worker has $100,000 in retirement savings at age 45, without conflicted advice it would grow to an estimated $216,000 by age 65 adjusted for inflation, but if she receives conflicted advice it would only grow to $179,000—a loss of $37,000 or about 17%,” the White House explains in a statement.
Congresswoman Maxine Waters (D-Calif.), ranking member of the Financial Services Committee, said she supports the proposed rule because of its focus on protecting Americans’ hard-earned retirement savings.
“I’m pleased that President Obama is focused on putting forth rules to ensure that financial advisers are required to act in the best interest of middle class families, retirees and those saving for retirement,” she said. “The report released today by the Council of Economic Advisers shows how conflicts of interest, backdoor payments and hidden fees are hurting average Americans, exacerbating income inequality and widening the racial wealth gap.”
Is There a Downside to Fiduciary Standards and Your Retirement Plan?
While the rule seeks to avoid this conflict of interest, some in the industry fear that this will only limit the available investments and advice for retirement accounts.
Those in the financial planning business will face increased scrutiny along with higher costs of doing business as a result, they say. This could mean fewer options and less upside potential for clients.
“Brokers [might not] choose not to offer services for fear of litigation, or at a minimum, increase the cost of their services,” Saunders says.
In the coming months, the Department of Labor will issue a notice of proposed rulemaking, beginning a process in which it will seek public feedback on the best approach to modernize the rules on retirement advice and set new standards.
Should You Use a Financial Advisor?
Regardless of when the new legislation is implemented, there are many great financial planners who are passionate about helping their clients meet their goals in retirement.
“Make sure you’re comfortable with your planner,” advises Founder and Principal at Las Vegas-based Belmore Financial, LLC Kate Holmes. “There shouldn’t be any pressure to make an immediate decision or sign anything. Financial planning is about honest conversations, embracing what makes us happiest, and creating a plan to go after that.”
Research has indicated that working with a financial planner for your retirement:
- Makes you feel more confident — “Baby Boomers Can Boost Retirement Confidence with One Easy Step“
- Improves your results — Study Shows “Retirement Plans with Advisors Yield Better Results“
However, many find that the best reason to use a financial advisor is that it just makes you take action. There is someone there making retirement planning something you do, not something you should do.