Many workers, including those just starting out, are acutely aware of how vital it is to plan for retirement and put aside money for their golden years, because Social Security benefits don't guarantee a comfortable retirement. Most companies no longer offer defined benefit pensions, but many do provide defined contribution plans such as 401(k)s.
The laws governing these plans require custodians and advisors to act in the best interests of their clients, and those "fiduciary" rules were extended in April to cover individual retirement accounts as well. While generally regarded as a good thing, the new rules may also narrow the retirement savings choices open to workers.
April's fiduciary rule, set down by the U.S. Department of Labor and effective starting in April 2017, is meant to protect workers who transfer their retirement savings from a 401(k) to an IRA. Under the new rule, IRA custodians can no longer churn customers' investments from one product to another just to gin up commissions, nor can they steer customers into overpriced products.
The biggest change is that stockbrokers, mutual fund managers and other advisors must act in their retirement-account clients' best interests rather than just give "suitable" advice.
The new rule affects about $14 trillion in retirement savings held by almost 125 million U.S. households in 2015. About 40 percent of these households do not have an employee-sponsored retirement plan or an IRA. Those with only an employee-sponsored plan number 28 percent, whereas 5 percent only have IRAs and 27 percent have both.
The money that retirement investors save in hidden fees and lofty commissions comes right out of the pockets of the financial adviser industry. In order to stay in business, many advisers will have to reduce the range of products they offer to the cheapest, simplest ones. Also, retirement investors who desire to have more choices will have to pay extra to get them.
Take for example Edward Jones, a brokerage company with about 4 million retirement accounts. It announced last week that it would cease offering exchange-traded funds and mutual funds that slap retirement investors with sales commissions. Edward Jones is the first large brokerage to announce this kind of change, but others will surely follow suit. Brokers will have to justify how much they are compensated via sales loads on retirement investment products such as IRAs. About $3 trillion might be lost to advisors and saved by investors.
No-load funds charge fees based on the amount invested, not on trading activity. Therefore, if you seldom trade your retirement investments, the new fee schedule may cost you more than activity-based charges.
Retirement investors can choose to remain in sales-load funds, but the new rules will apply to any new purchases after the April 2017 deadline. Most financial advisers are waiting until the deadline is much closer to announce how they plan to comply with the new rules.