Those trying to do the right thing by saving for retirement — and seeking professional help to do so — deserve investment advice in their best interest. The most fundamental obligation of a financial professional should be to put their customers’ interests ahead of their own and those of their firm. “Fiduciary” is the legal term for a financial professional who is held to the highest standard of conduct under the law for advice they provide to people saving for retirement.
Today, we can take a major step toward closing the “retirement advice loophole” that exposes millions of American workers to conflicted advice. The Department of Labor has issued a proposed “conflict of interest” Employee Retirement Income Security Act rule to close the loophole. The rule would hold financial professionals who give investment advice to individual retirement plan investors to the highest standard and require them to put the interests of their clients first.
The proposal, currently in a public comment period, faces fierce opposition from powerful segments of the financial services industry — and by their supporters in Congress, including legislation to delay or kill the new rule. We believe members of Congress owe it to their constituents to support the rule, so that retirement savers can receive objective advice on the biggest financial decision of their lives: how to invest their hard earned money.
Surveys have shown that Americans — understandably — assume that all advisers are already required to act in their best interest under the “fiduciary” standard. But we know this is not the case and so do the opponents of this rule. Today, different types of financial advisers operate under different standards when providing investment advice.
The rules in place that govern those who provide advice on retirement investments were written in 1974, long before IRAs and 401(k) plans existed. They are woefully out-of-date. A “retirement advice loophole” in the rules allows more lenient standards for some financial advisers, often with major conflicts of interest, to put their own financial interests ahead of those of their clients.
Many retirement advisers readily accept fiduciary responsibility and are accountable to serve investors’ best interests under the law. Others who could take advantage of the retirement loophole avoid conflicts of interest and do what is right by investors, regardless. But the “retirement advice loophole” has created a system that encourages conflicts of interest leading to higher fees, unnecessary risks, and/or lower returns for investors in order to produce higher profits for financial service firms and their representatives.
The total cost of conflicted advice is staggering. Research by the White House Council of Economic Advisers suggests that millions of current retirement plan investors lose upward of $17 billion a year. When the average American finds it difficult to save enough for a comfortable retirement, the high costs of conflicts make the hurdle to achieving this retirement goal even higher.
The key decisions most face in their lives are medical, legal and financial — areas in which people need specialized help. The consequences of bad advice in these fields can be devastating. Doctors and lawyers must, by law, place their clients’ best interests first. It is unacceptable that only some financial advisors are held to this standard.
One clear example of harm stemming from the loophole that allows conflicted financial advice involves IRA rollovers. A 2013 report by the non-partisan Government Accountability Office provides alarming evidence of financial firms having aggressively encouraged callers to roll over 401(k) plan savings into an IRA with only minimal knowledge of their financial situations. They also often claimed that 401 (k) plans “had extra fees” and that IRAs “had no fees” and were “always less expensive” when the opposite is generally true.
Most Americans with retirement savings now rely on individual account plans, so the responsibility for investing the plans’ assets falls on the individual. The rules must be updated to ensure all retirement plan advisers act in the “best interest” of the individual investor. Failure to act will continue to cost Americans billions of dollars each year — money they cannot afford to lose.
We encourage others to join forward-thinking leaders in the field of financial services and consumer and investor advocates in actively supporting regulatory reform to achieve a universally high standard for all who provide investment advice. We also suggest that investors who seek trustworthy financial advice make sure their advisers are, in fact, committed to serve their clients’ best interests.
Blaine Aikin is chief executive officer of fi360. Nancy LeaMond is AARP’s chief advocacy and engagement officer.