From Conflict of Interest to Best Interest

By Amelia Collins, Legislative Fellow, NCLR

Thirty-eight million working-age households have nothing saved for retirement.

This retirement savings deficit is worse for communities of color, with 62 percent of Black and 69 percent of Hispanic households with no money in a retirement account. For those who do save, their account balances are disproportionately low: three in four Black households and four in five Latino households aged 25–64 have less than $10,000 in retirement savings, compared to one in two White households.

With too many Americans already struggling to save enough for retirement, any loss in retirement funds jeopardizes retirees’ financial security. One of the biggest drains on retirement savings is “conflicted advice.” Conflicted advice occurs when those giving advice can steer clients into higher-cost products to boost their own bottom line, even if those products aren’t the best for the client’s savings. Unfortunately, current regulations allow many who market themselves as financial advisers to make these conflicted recommendations. Back in April the Department of Labor (DOL) proposed an update to prevent conflicted advice on retirement investments. The proposed rule would ensure anyone providing investment advice for a fee—whether a registered investment advisor or a broker—will suggest products that are in the best interest of their client.

The DOL regulation would also strengthen the financial security of Hispanics, who are already disadvantaged in the retirement space. Barriers already prevent Latinos from saving enough for retirement, making it all the more imperative that the advice they receive helps them improve savings and bolster account balances.

Workers of color have less access to retirement savings vehicles compared to Whites: 38 percent of Latino employees, 54 percent of Black employees, and 54 percent of Asian employees aged 25–64 work for an employer that sponsors a retirement plan, compared to 62 percent of White employees.

Further, as Latinos tend to have lower balances in their retirement accounts, higher fees represent a higher proportion of their retirement savings absorbed by advisers and financial institutions. This makes Latinos even more vulnerable to financial instability. Quality standards for advice provided for a fee are especially important to Latino and other low-income consumers to ensure the advice they receive is truly in their best interest.

As part of the regulation process, the DOL asked groups for their input on the proposal. NCLR weighed in this week in support of the proposed rule and applauds the department’s commitment to a strong, workable rule. This Tuesday, the Senate Committee on Health, Education, Labor, and Pensions Subcommittee on Employment and Workplace Safety held a hearing on the proposal. Department of Labor Secretary Thomas Perez defended the rule, saying “as long as we don’t lose sight of the North Star—an enforceable best-interests commitment—we are very flexible on the question of how to get this work done.”