How This Recent Executive Order Could Affect Your Retirement Savings
You’ve probably heard about the Obama administration’s “fiduciary rule,” a long-term group project with the Department of Labor that was set to go into effect on April 10, 2017.
After years of planning and deliberation, the fiduciary rule was set to increase the level of attention and care paid to retirement accounts, whether those accounts were managed by a financial advisor or a brokerage firm.
But President Donald Trump feared the fiduciary rule would reduce options for investors, while stifling professionals who already thought they were protecting their customers.
Trump signed an executive order on Friday, Feb. 3, permitting the Department of Labor to review and revise the rule.
While a draft of the order delayed the rule’s April 10 effective date, the order’s final text lacked such instruction.
“Now, the rule will still go into effect April 10 even as its ultimate fate remains in limbo,” CNBC’s Yian Mui explains.
The fiduciary rule’s journey is a winding one, but its fate could affect how you make decisions about your retirement savings and investments.
The Fiduciary What?
The rule would have required retirement-planning advisers to act for their client’s benefit at a “fiduciary” level. It may seem obvious, but not everyone who gives investment advice may have their clients’ best interests at heart.
Investment advisers are held to high standards under the Securities and Exchange Commission, which explains their duty in something akin to a scout pledge:
As an investment adviser, you are a “fiduciary” to your advisory clients. This means that you have a fundamental obligation to act in the best interests of your clients and to provide investment advice in your clients’ best interests. You owe your clients a duty of undivided loyalty and utmost good faith. You should not engage in any activity in conflict with the interest of any client, and you should take steps reasonably necessary to fulfill your obligations. You must employ reasonable care to avoid misleading clients and you must provide full and fair disclosure of all material facts to your clients and prospective clients.
That’s super charming, right? On my honor I will try to serve my clients so they do not lose a ton of money. Good rules to follow.
“If you have a financial planner or an adviser who is a registered investment adviser, you are already getting fiduciary-level care because they already are required to adhere to that standard,” the Wall Street Journal explains.
But if you’re managing your retirement accounts through a broker or insurance company, you may be getting advice that only meets a “suitability standard” -- it meets your needs based on your investment profile -- instead of getting solid advice based on your needs and your best interest.
That means your broker could recommend an investment plan that’s OK, but puts you at greater risk than you’re comfortable with.
Proponents of the rule say fees and payments cost Americans a percentage point per year on their retirement savings -- an overall $17 billion per year.
One percentage point may not seem like a lot, but if you have a healthy retirement savings and you’re pressured into moving your funds to a plan that isn’t a great fit for you (but earns your broker big-time), that one percent point can add up fast.
The financial-industry’s pushback on the rule argues the $17-billion statistic is overblown, and the new rule would limit access to advice for people who don’t trade often or who have saved smaller amounts.
If Fiduciary Rule Kicks the Bucket, Your Investments May Still Be Safer
The WSJ reports that brokerages have already spent major money in anticipation of Obama’s fiduciary rule so their business models fit the mandate. Those modified plans limit commission sizes or ditch commission-based retirement accounts altogether.
Even if Trump and the Department of Labor edit -- or dump the rule completely -- some firms may keep those plans already in place.
Merrill Lynch, for example, has ended its commission-based retirement accounts completely in anticipation of the fiduciary rule, and said even if the rule gets rolled back, it will instead charge a fee “based on a percentage of assets.”
Your Turn: Have you started saving for retirement?
Lisa Rowan is a writer and producer at The Penny Hoarder.