Many of us do what we can to avoid paying a little extra here and there — such as making sure to spot a low price at the pump when filling up the car or searching an app for any extra discounts. It adds up after all.
Yet it’s shocking to consider that extra hidden fees associated with saving for retirement can really add up over time. Maybe even taking a 20% chunk out of your retirement nest egg over a lifetime, according to the White House, which is seeking to put a stop to junk fees that chip away at retirement savings.
You know what you’re paying for a gallon of gas. Do you have any idea what it will cost you over time if you decide to roll over your 401(k) into an IRA?
Ensuring retirement savings are secure
The Department of Labor has proposed a retirement security rule that would update the definition of an investment advice fiduciary under the Employee Retirement Security Act. The department is responsible for ensuring that retirement savings vehicles are secure and operated according to the federal pension laws and regulations.
“America’s workers and their families should not have excess fees and lost investment returns chipping away at their retirement savings due to the cost of conflicted investment advice,” said Labor Department Acting Secretary of Labor Julie Su in a statement.
No doubt, we’ll see a huge push back from interested parties in the financial service universe on such proposed changes. You probably could bet your 401(k) on it.
Yet it doesn’t mean the fight isn’t worthwhile for savers.
Some advice can benefit the adviser, not you
Someone saving for retirement could see their returns go up by between 0.2% and 1.2% each year when financial advisers focus on recommending investment products that benefit the saver, not the adviser, according to the White House.
Seeing a figure like 1% or less sounds like nothing, really, until it all adds up over time.
Over a lifetime, the White House noted, the extra fees can add up and reduce someone’s pool of retirement savings by up to 20%. We’re talking about fees taking away tens of thousands of dollars for many savers.
The old rules were put in place in 1975 when more people were covered by traditional pensions. IRAs were less common and 401(k) plans did not exist, the Labor Department noted.
Unfortunately, now many of us must make critical decisions about how to build and protect our retirement savings. We’re not talking about a frivolous stash of cash here. We’re talking about knowing that we’ll be able to cover real life expenses — property taxes, rent, car repairs, electric bills, health care — when we’re in our 70s, 80s and maybe even 90s.
Many times, people turn to a financial adviser when they leave a job or retire for advice on how best to manage their money for the long haul.
Suddenly, an employer might offer a buyout, such as the $50,000 buyout for an unlimited number of UAW members at Ford Motor Co. that was part of the tentative agreement reached on Oct. 25 and now subject to ratification voting by members. And the employee wonders how to invest that cash.
Yet, many consumers don’t realize that the advice given isn’t always driven by the best interest of the saver.
“If the advisers are winning a contest to go to the Bahamas or Hawaii, then that’s paid for by the retirement saver’s assets,” said Dana Muir, a professor at the University of Michigan Stephen M. Ross School of Business and a national expert on pensions and retirement.
“And I think the retirement saver’s assets should be invested so that the retirement saver can go to the Bahamas or Hawaii, not so the investment adviser can.”
Muir, who worked with a consortium of those supporting the added regulation, called the proposed changes “tremendously important” to ensure that advisers don’t exploit existing loopholes.
She said the changes would level the playing field for those financial advisers who already put their clients first.
Often, people go to an adviser fearing that they’d pick the wrong investment on their own, but they don’t realize that they could pick the wrong adviser who recommends a high-fee approach.
“It’s a little bit like going a doctor because you go and you rely on them to understand more than you do and to give you good medical advice,” Muir said.
“When people go to financial advisers, they expect to get advice in their best interest. But not every financial adviser does that.”
In some cases, she said, the financial adviser could get paid more to recommend ‘X’ investment instead of ‘Y’ investment.
For example, the Labor Department noted that an analysis regarding the sale of fixed index annuities suggests that conflicted advice may cost savers overall as much as $5 billion per year.
Retirement savings trouble spots
The Labor Department proposals include a 60-day period for public comment, and a public hearing will be held. The White House said the goal is to close loopholes to offer more protection to retirement savers in three key areas:
- Rollovers from a 401(k) into an IRA. Making sure that an adviser is operating in the saver’s best interest when recommending that retirement savings be moved from a 401(k) at an employer into an IRA at an investment firm. Oddly enough, the White House noted, advice that typically is provided on a one-time basis, such as when rolling assets from a 401(k) plan into an Individual Retirement Account or annuity, is currently not required to be in the saver’s best interest. State laws might offer some protection. But even Michigan’s rules seem to have a few loopholes. The Michigan rule does not require annuity advisers to be fiduciaries; but the Department of Labor rule would, U-M’s Muir said.
- Annuities and other products recommended for retirement savings. Advisers currently have more wiggle room to make such recommendations, even when not in the retirement saver’s best interest. More protection is currently offered with mutual funds.
- The 401(k) line up or what’s actually offered as an investment option in the 401(k) plan. Advice given to a plan’s sponsor about what mutual funds to offer as options to employees in a 401(k) plan would need to be given based on the retirement saver’s best interest.
“Fees are extremely important. They can reduce your pile at retirement,” said Alicia Munnell, director of the Center for Retirement Research at Boston College.
Over the years, she said, progress has been made on reducing and disclosing many fees, but more needs to be done to close loopholes that don’t ensure that the adviser is acting in the best interest of the client.
Munnell said the issues surrounding the IRA rollovers is significant because many times, retirement savers will seek such advice on a one-time basis.
Right now, though, the Employee Retirement Security Act, the federal law governing retirement plans, advice that is provided on a one-time basis, such as advice to roll over assets from a 401(k) plan into an Individual Retirement Account (IRA) or annuity, is typically not presently required to be in the saver’s best interest.
Roughly 5 million savers each year roll their money out of 401(k)s and into IRAs, the White House noted. In 2022, savers rolled over about $779 billion from defined contribution plans, such as 401(k)s, into IRAs.
“It’s an enormous decision that has a profound effect on the money available in retirement,” she said.
“When you retire, it’s a big decision and you’re out there sort of floundering a bit and you say ‘What should I do with all this money?’ ” Munnell said.
“If the person is conflicted, they can easily say ‘Roll it over into an IRA.’ “
It’s possible that your 401(k) plan has investment options with lower fees. Each situation can vary but you don’t want to be given advice that only benefits the adviser.
Munnell said the proposed Labor Department rules could help ensure that advisers avoid recommending high-fee mutual funds to 401(k) plan sponsors, too.
Biden’s move to crack down on advisers recommending high fee investment products to retirement savers mirrors other efforts by his administration to cut down on hidden or junk fees.
“Hidden fees” used by airlines, car rental companies, online ticket sellers, banks and others are being targeted by the Biden administration, as well.
The Federal Trade Commission is proposing a rule that, if finalized, would ban businesses from using hidden fees, require honest pricing and ensure consumers know how much they are paying up front.
For many consumers, it’s relatively easy to spot some wild fees for concert tickets, even if it’s only when you get to the final steps before you pay. Not so much for retirement savings plans, which is why something really needs to be done.
Contact personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on Twitter @tompor.
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