Proposed rules aim to protect retirees’ savings

Federal regulators have proposed rules, more than four years in the making, to provide more consumer protection for retirement savings, requiring a broader group of investment professionals to act in their customers’ best interest when dealing with their retirement money.

The financial services industry can be a minefield for ordinary investors, who often cannot tell whether their advisers are putting the investors’ interests first; the legal term for this is fiduciary duty. The long-awaited rules, proposed in mid-April by the Labor Department – which oversees retirement accounts – are part of the Obama administration’s declared mission to support the middle class.

The proposed rules would eliminate some of the loopholes that allow brokers to avoid acting as fiduciaries when providing advice on retirement money held inside accounts like 401(k)’s and in individual retirement accounts, which hold roughly $7 trillion, as estimated by the Federal Reserve.

The effort is expected to save investors $40 billion over 10 years, and that estimate takes into account only some of the conflicts that plague the financial services industry, according to the regulators.

“We want to make sure people get put into products that work best for them,” Labor Secretary Thomas E. Perez said in a conference call with reporters. “We have met way too many people who have worked their tails off for retirement, they had barely enough saved to begin with, and then they were steered into a product that was unduly complex.”

The new rules would update the Employee Retirement Income Security Act, or ERISA, which was written in 1975.

Four decades ago, many retirees relied on pensions and did not have to worry about managing the bulk of their retirement savings. But now, as people are living longer and relying on money from self-directed retirement plans like 401(k)’s and 403(b)’s, the burden falls to the individual.

Investors are particularly vulnerable when they roll over the savings they have accumulated in their 401(k)-type retirement accounts, which are overseen by their employers, into individual retirement accounts. If a broker is advising a customer on that transaction, they do not necessarily have to act in the customer’s best interests and may be influenced by higher commissions or other incentives the firm has put in place.

As a result, investors’ money may not end up in the most appropriate investment, potentially costing them thousands of dollars over many decades. In 2012 alone, rollovers to IRAs exceeded $300 billion, and that is expected to rise steadily in the years ahead.

ERISA currently requires investment professionals to act as fiduciaries when providing investment advice, but “advice” is defined narrowly. The proposal would expand that to include any professional receiving compensation for providing individualized advice, or advice to an employer with a retirement plan, workers taking part in those plans, or IRA account holders.

“Being a fiduciary simply means that the adviser must provide impartial advice in their client’s best interest and cannot accept any payments creating conflicts of interest unless they qualify for an exemption intended to assure the customer is adequately protected,” regulators said in a statement.

This story was originally published April 25, 2015 at 7:55 PM.