When it comes to retirement saving, there are two kinds of people.
The first kind deposits money into their retirement accounts and crosses their fingers that someone’s going to invest it wisely for them.
The second kind works with a money pro to periodically move their savings around to get the best return on their investment.
(I am the first type of person. Please tell me you are also the first type of person so I’m not in this alone.)
When President Barack Obama left the White House last month, he thought the Department of Labor would manage a new rule protecting people saving for retirement.
The Obama administration’s fiduciary rule — a long-term group project with the Department of Labor — was supposed to go into effect on April 10, 2017.
But President Donald Trump fears the fiduciary rule reduces 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. In the meantime, the April 10 deadline is out the window.
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.
The post How This Recent Executive Order Could Affect Your Retirement Savings appeared first on The Penny Hoarder.
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