Saving for Retirement – New Federal Rule
White House Announces New Federal Rule to Protect People Saving for Retirement
April 6, 2016. President Obama directed the Department of Labor to move forward with a proposed new federal rule that changes the standards for financial advisors. Retirement advisors will be required to follow a “fiduciary standard” which means they must put their clients’ best interests before their own profits.
Under the old rule, financial advisors were not required to act in the best interests of their clients when giving retirement advice. Advisors could steer investors to investments with hidden fees and higher commissions. The advisor would earn more and those saving for retirement would lose (and their retirement savings would suffer). A system where investment firms benefit if they talk Americans into buying investments at a high cost, giving investors low returns, is unfair.
The White House Council of Economic Advisors (CEA) conducted a study (“The Effects of Conflicted Investment Advice on Retirement Savings“) that found that conflicts of interest cost middle-class families huge amounts of their hard earned savings. The CEA study found that this practice led to:
- 1 percentage point lower annual returns on retirement savings
- $17 billion of losses every year for working and middle class families
The new rule will assist those saving for retirement by reducing the hidden fees paid in 401(k) plans and other retirement investments. In the coming months, the Department of Labor will issue a notice of proposed rulemaking, beginning the process where it will seek public feedback on the best approach to modernize the rules on retirement advice and to set new standards. The rule change is scheduled to take effect in January 2018.