After years of talk about how to protect retirement savers, the White House has gotten behind a Labor Department proposal that would require financial advisers to put clients’ interests ahead of their own.
Consumer champion Sen. Elizabeth Warren, who says she is not running for president, is doing wall-to-wall media on her view that the government should do more to regulate providers of 401(k) plans, 403(b) plans and individual retirement accounts.
The Supreme Court heard arguments on Tuesday in a case challenging high 401(k) fees.
But savers should not pop champagne corks yet. It takes forever and a day to legislate and regulate in Washington. Even if it ends up on a fast track, the Labor Department’s draft rule is expected to leave a loophole big enough to drive the brokerage industry through.
Labor Department officials have said it would allow retirement advisers to continue selling investments on commission, as long as they disclosed that to clients.
There are several issues involved in regulating retirement investment advice. A primary one is the quality of 401(k) and 403(b) plans. Employers, who have a fiduciary responsibility to provide good plans to their employees, often hand over program management to consultants, who can keep program costs to employers low and jack up investment fees that workers pay when they buy funds in their plans.
A second issue involves the quality of advice investors get on their individual retirement accounts. If the advice is from brokers, there is a possibility investors are being put into mutual funds that carry higher fees than are optimal for them or are in other ways being put into funds that are not right for them. Higher fees may compensate brokers who are paid by commission or may compensate fund companies that spend the extra cash in ways that benefit the brokerage firms that offer their funds. That can result in investment advice that is conflicted.
After years of lobbying by the brokerage industry, the Labor Department is leaning toward a rule that would allow conflicts, such as commissions and fund company payments to brokerages, as long as they were disclosed. So investors take note: you are eventually going to have to read all the small print, so you might as well start now.
Here’s how to protect your retirement savings:
Check your 401(k) plan. Numerous large employers have spent big bucks to settle class action lawsuits focused on mutual fund fees in retirement plans, and fees have fallen. Average annual management fees of 401(k) funds are below 0.5 percent at large companies and below 1 percent at small companies. If your company’s fund choices are out of line, talk to your human resources department. If your only choices are substandard funds and high fees, put only enough in your 401(k) to get the employer matching contributions, and then invest additional funds in a personal IRA or Roth IRA.
Choose inexpensive mutual funds. Investing in low cost index funds instead of costlier actively managed funds will put you ahead. A person earning $75,000 a year who starts saving at age 25 would spend $104,033 in fees over a lifetime if fees were capped at 0.25 percent of assets annually. At 1.3 percent, that same worker would spend $409,202, according to the Center for American Progress. That extra $305,169 could support roughly $1,000 a month for life in extra retirement income.
Separate advice from your investments. If you want help figuring out which funds to invest in, pay a fee-only financial adviser, do not depend on “free” advice from a commissioned broker. You can get inexpensive advice from big fund companies like Vanguard, Fidelity Investments, and T Rowe Price, or from so-called “robo advisers” like Wealthfront or Betterment.
Be especially careful about rollovers. When you leave a job, you typically have the right to keep your money invested in your 401(k), an excellent choice if you work for a company that provides good funds within the plan. Or you can roll it over into a so-called “Rollover IRA” at any brokerage or fund company. Choose a low-fee fund company or discount brokerage that will enable you to choose your own investments from a large pool of individual stocks and inexpensive funds, and buy only the advice you need.