The Department of Labor has recently introduced a new rule for retirement investors. The goal of this “fiduciary” rule is to help guarantee that Americans saving for retirement are able to receive investment advice that is in their best interest. Also known as the conflicts of interest rule, this new rule was first introduced by President Obama as a means of providing for retired folk who want nothing more than to live out the rest of their lives in comfort.
However, Americans cannot retire if they are buying into bad retirement investments. The retirement advisors who handle the money can take advantage of these retirees by taking their retirement funds and investing in places that they shouldn’t, resulting in a low return.
ERISA and the Purpose of this Plan
To provide some background, the legislative body that has governed retirement savings accounts to this day has been ERISA. Enacted in 1974, the Employee Retirement Income Security Act is federal in nature and hence is present in all fifty states. ERISA gives certain protection to individuals who enter into retirement savings plans. However, this law has become somewhat outdated as the 401(K) and IRA have become more popular options these days. Defined benefit plans are not as common as they were before and now retirement advisors control what goes on with the investments.
To better protect these investments, this new rule will increase measures that will protect the retiree’s investments. The advisor must act as fiduciary for the investor (retiree) and this means that the advisor must put the interest of the investor before their own. Just as the board of directors of a large corporation owes a fiduciary duty to its shareholders, here too the same concept applies. A retirement advisor places the retirement savings money aside until the time is right for the retiree to pull from it. ERISA is not being repealed; rather its focus will be shifted to better provide for these hardworking people who have spent their lives saving money and want to reap the benefits.
The reason this enactment has been created is because there are times when advisors will provide ill advice to the investor or will misguide the investor as to what savings plan they should go into. Investors might intentionally even use these savings funds to invest elsewhere, which could lead to a net loss for the investor. Other times it’s as simple as the investor not reading the fine print of the plan, which ends up hurting them in the long run.
The goal of this piece of legislation is to ensure that retiree’s investments are handled wisely and that these retirees are given the right advice, regardless of whether they want to open a Roth IRA or some other form of retirement savings account. If advisors do not act in the best interest of the investors, then there are penalties that will be enforced against them. The legislation comes with many provisions and some of these provisions act as incentives for these advisors to do the best job that they can. If they do not, they can be personally liable to restore any losses to the plan, or to restore profits that were mishandled by them.
Ultimately, this seems like a huge improvement over the old system. As mentioned before, ERISA is still the name of the game. With this new enactment, the landscape is slowly shifting to give investors a little more breathing space. Although ERISA has provided safeguards to investors in the past, this has not been enough to give full protection to their assets. Part of it has to do with the fact that employers do not always comply with ERISA. Other reasons are that retirement advisors are profit seeking as much as anyone else. However, as the fiduciary, the advisor must do whatever is in their power to give their client, in this case the investor, the best possible deal out there. It should not be a self-serving engine but a tool that they have at their disposal to best meet the investor’s needs.
Only the Beginning
This new legislation is a good start but there is more work to be done. There are many stories out there that show that many investors lose out simply because they don’t know what a retirement plan is and what is best for their particular needs. With the right guidance and support, they will be able to reap the benefits of the seeds that they have sowed many years back. There can be even better safeguards that can be used to further protect these investors. Employers can fund programs, which educate their employees on the different savings plans.
Many Americans today don’t have a good understanding of how these different savings plans work and how they can best serve their particular needs. Advisors are only a part of the story. There has to be a bigger involvement by the managers and heads of companies in educating the lower echelon on these different investment strategies. Society will be better off if savings accounts are effectively run.
Authored by Sam Behbehani, LegalMatch Legal Writer
I think this is a responsible initiative to improve on the system. Lack of education, especially in finance, leaves people vulnerable to being taken advantage of. I have often thought that financial education could start with the school system - just to get an understanding of the basics. Then, for the government and employers to work together to provide information and perhaps some assistance to people in the first few years of their working life, to help the employees make their own decisions to ensure a more financially secure future.
Posted by: Rochelle | August 04, 2016 at 07:06 PM