The Labor Department took a crucial step to protect retirement savers last year by adopting a “conflict of interest” rule that requires that retirement advisors put their clients’ best interests before their own when giving advice.
Last month, the Trump administration pushed back the rule’s effective date to June 9. Now, some in the financial industry are urging another delay, at a time when our nation’s retirement savers can least afford it.
We’ve had a paradigm shift in how we save for retirement in this country. For much of the last century, many Americans worked for 40 years with the same company and retired at 65 with a party, a gold watch and a lifetime pension with a defined benefit.
That world is gone. One-third of the private-sector workforce today – more than 40 million Americans – lacks access to any employer-sponsored retirement savings plan at all. For those who do have access, only about one in five has access to a pension that provides a “defined benefit,” whereas three in five have access to “defined contribution” plans that put the onus on workers to save and make their own investment decisions.
Staying in one job over the course of a career is the exception, not the norm, so workers can leave a string of employer-sponsored defined contribution plans behind them, without a unified investment strategy. As a result, individuals approaching retirement today have, on median, retirement savings of only $17,000.
With defined contribution plans as the principal retirement savings vehicle, consumers now have to manage their own assets and make their own high-stakes, life-altering decisions. But the landscape is complex and confusing, with a countless array of ever-evolving investment vehicles – all different in some respect – to choose from.
That’s why it’s so important for retirement savers to have access to sound investment advice. But while the investment vehicles and retirement terrain may have changed, the rules of the road have not. The regulations that govern investment advice for retirement assets, in fact, were written under that old paradigm, way back in 1975. And they haven’t been updated since.
Last year, the Labor Department updated 40-year-old rules that were written for the old paradigm. The new conflict-of-interest rule says that when retirement advisors provide investment advice, they have to put their clients’ best interests first, not their own.
The rule would ensure that we can trust our retirement advisers to be fiduciaries – just like doctors and lawyers – who agree to provide advice that’s in their clients’ “best interests.” And if they give advice based upon fees or commissions that benefit themselves and create any conflicts of interest, retirement advisers have to enter into a contract with their customers disclosing those conflicts and pledging to take steps to mitigate them.
While many in the financial industry have long been on track to comply with the rule, some are still defending the old model where advice can be conflicted and retirement savers can be kept in the dark and, as a result, receive subpar returns that can lead to inadequate retirement income.
The Trump administration recently delayed the rule’s effective date for 60 days, costing retirement savers hundreds of millions of dollars over the long run, and announced that some enforcement provisions will not take effect until 2018.
Either would be a mistake. With the demise of traditional pensions, most of us have to manage our own retirement planning and make sense of increasingly complex financial products. These are challenging decisions, especially for people who set up their own accounts because they don’t work for an employer who provides one, and for those who switch jobs and want to roll over their 401(k)s into new accounts, which requires choosing a new basket of investments.
Now, more than ever, all of us retirement savers need to know – and have a right to know – whose side our financial advisers are on.
Christine Owens is executive director of the National Employment Law Project, a non-profit research and policy organization to protect and promote employment-based opportunities, benefits and protections for low-wage and unemployed workers.