Watch Out for 401(K) Rip-Offs
The new rules for retirement advisors that the President and consumer advocates are pushing address a conflict of interest the White House estimates costs retirement savers $17 billion annually. The problem? Contrary to what many investors believe, the advisors who direct them to retirement funds are not always required to act in their clients’ best interests.
“People have incentives to push people in products that might not be the best for them, and when we’re talking about longterm retirement savings even a small difference can make a big impact in the longterm retirement savings,” Anne Tucker, a professor at Georgia State University College of Law, told TPM.
“The way broker-dealers are often compensated is they get a percentage of retirement investments in vehicles in which their clients select, so they have incentives to place their clients or their customers in certain products that they get compensated for,” Tucker said. “The idea is this conflicted advice costs individuals because they may be being encouraged to invest in vehicles that are higher fees, or may not produce the same longterm returns on their retirement investment.”
To use one example from a White House-cited report: “A retiree who receives conflicted advice when rolling over a 401(k) balance to an IRA at retirement will lose an estimated 12 percent of the value of his or her savings if drawn down over 30 years.” That amounts to five fewer years a retiree can afford to live off of his or her investments, the report said.
The proposal from the Department of Labor would essentially require that financial advisors behave in their clients’ best interests when offering retirement investment advice, something that three-quarters of investment advice consumers assumed already was the case.