Ever wonder whether the broker handling your retirement account acts in your best interests? Under new federal rules, he or she will be required to.
Up to now, brokers were simply required to recommend “suitable” investments to retirement savers. Going forward, they’ll have to meet a stricter standard. The Labor Department says the move will crack down on conflicts of interest that lead some investment professionals to steer savers into high-fee products with lower returns.
Here are highlights of the new rules, which will be phased in starting next year with full implementation by the beginning of 2018.
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▪ Brokers are no longer exempt from a ‘best interest’ standard. Even before the changes, retirement-investment advice – like when to roll over from an employer-based 401(k) to an individual retirement account – could come from various professionals, such as a broker or registered investment adviser. Registered investment advisers, though, were obligated to act in the best interests of their clients – a standard brokers did not have to meet. Now, brokers who provide retirement-investment advice will also have to meet the higher standard. The Labor Department described the change as fixing a “broken” regulatory system that permitted “misaligned” incentives for investment professionals.
▪ Families are expected to see improved savings. According to the Labor Department, conflicts of interest in retirement advice cost American families an estimated $17 billion a year. In one example, the department said a typical 45-year-old worker who receives conflicted advice when rolling over a 401(k) balance to an IRA will lose an estimated 17 percent from their account by age 65. According to the department, the new rules will save affected middle-class families tens of thousands of dollars in retirement savings.
▪ Fees and conflicts of interest must be disclosed. The rules require firms to maintain a website that includes certain disclosures, such as compensation and incentive arrangements with advisers. Individualized information about a particular adviser’s compensation is not required to be included on the site, though. The website must also disclose material conflicts of interest. Before the new rules, brokers could push clients toward, say, a mutual fund that paid the broker a higher commission without having to share that conflict of interest with the client.
▪ Commissions are still allowed. Those mutual fund companies can keep paying those commissions to your broker. Under the new rules, many of the industry’s current compensation and fee practices will continue to be permitted, as long as customers are receiving advice that is in their best interests.
The new rules have drawn stiff opposition from the financial industry, which has argued firms will have to spend more money to comply with the changes. The industry has also said the rules could cause brokers to avoid savers who have smaller accounts. The Securities Industry and Financial Markets Association, an industry trade group, said last week it remained concerned the rules “could force significant changes to current relationships, which may leave clients without the help they need to prepare for retirement, at a time when we all agree that more can and should be done.”