Ensuring that Retirement Advice Is Sound

Things have changed since 1975, the last time rules for retirement investment advisors were updated. Since then, the retirement savings market has seen a shift from employer-managed pension plans to self-directed plans like Individual Retirement Accounts (IRAs) and the 401(k). Now more than ever, savers rely on the advice of financial professionals to help them make decisions that will affect their financial security in retirement. While most financial advisors are knowledgeable and ethical, the outdated rules create avenues for deceptive or abusive financial management practices.

To protect workers from unscrupulous investment advice, the Employee Retirement Income Security Act (ERISA) was enacted in 1974 to apply a fiduciary standard to those advising on the management of retirement savings. The requirement demands that advice be in the best interest of the advisee and that advice doesn’t constitute a conflict of interest for the advisor. Last week, the Department of Labor proposed a rule to update the fiduciary requirement to align ERISA protections with the contemporary retirement savings environment. The rule would require that the advice from advisers on 401(k)s and IRAs must be the best possible for the advisee.

Latinos have much at stake in this debate as nearly 2.3 million Latino households use either a financial planner or broker, according to the Federal Reserve Survey of Consumer Finances. Additionally, Latinos face larger barriers to save for retirement and have fewer retirement savings options. Two-thirds of Latinos work for employers, often small businesses, which do not offer private retirement plans; as a result, their reliance on professional financial advice increases.

Currently, a gap in the law permits brokers who provide this advice to evade this fiduciary standard to the detriment of hardworking Americans. For example, advisors might recommend retirees or those transitioning between jobs to roll over their 401(k) funds into an IRA, which could subject enrollees to higher fees and weaker consumer protections. Further, advisors could steer IRA investors toward high-cost financial products if better, less costly choices were available. These costly and potentially risky investments cost American workers billions of dollars each year. A report from the Council of Economic Advisers emphasized the cost of unsound retirement savings advice, finding:

• Conflicted advice leads to lower investment returns. Savers receiving conflicted advice earn returns roughly one percent lower each year (for example, conflicted advice reduces what would be a six percent return to a five percent return).

• An estimated $1.7 trillion of IRA assets are invested in products that generally provide payments that generate conflicts of interest. Thus, we estimate the aggregate annual cost of conflicted advice is about $17 billion each year.

• 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. If a retiree receiving conflicted advice takes withdrawals at the rate possible, absent conflicted advice, his or her savings would run out more than five years earlier.

• The average IRA rollover for people ages 55–64 in 2012 was more than $100,000; losing 12 percent from conflicted advice has the same effect on feasible future withdrawals as if $12,000 were lost in the transfer.

The report estimates that total losses amount to be between $8 billion and $33 billion a year. NCLR stands with a broad coalition of consumer groups, worker’s rights organizations, and civil rights advocates to support the Department of Labor and the proposed rule protecting all Americans from harmful retirement savings advice.