President Donald Trump’s plan to review the Labor Department’s fiduciary rule may be good news for Wall Street, but not for hard-working Americans saving for retirement.
The government has estimated that hidden fees and backdoor payments cost Americans more than $17 billion per year. The Labor Department rule was supposed to reduce these fees and force retirement plan providers to act in their clients’ best interests.
You read that right: Retirement plan providers—a $6 trillion market—have long behaved as if Americans’ retirement savings belonged to the providers. For 30 years, 401(k) providers didn’t have to disclose their charges—operating like stores without price tags. They were forced by law to begin providing fee disclosures less than five years ago. But these huge, opaque documents are confusing and most business owners and investors don’t know they exist. As a result, 70% of Americans believe they pay no 401(k) fees, even though fees dramatically shrivel savings over time.
Whatever happens with the president’s review, if you’re in a 401(k) plan or an Individual Retirement Account (IRA), you don’t need to count on the government to rescue you.
I’m a fan of the fiduciary standard. Doctors and lawyers are legally required to do what’s best for you—why not your financial advisor as well? While most people assume financial advisors are registered investment advisors (RIAs), who are legal fiduciaries, it turns out that less than 4% of them are. As if this weren’t confusing enough, there is another class of RIAs, so-called dual-registered RIAs, who are affiliated with a brokerage and sell financial products for a commission.
My big complaint about the Labor Department rule is that it didn’t go far enough. By the time lobbyists were finished influencing it, the rule had already lost most of its teeth. Brokers can still charge commissions, sell their own overpriced name-brand funds, and whack you with frontloaded sales charges. They can even ask you to sign away your rights. It’s “kind of” a fiduciary rule, if such a thing even exists.
So given these lack of protections, what can someone who wants to save responsibly for their retirement do?
First, take charge of your financial well-being and get a financial advisor who deserves your trust. Find an advisor who is a true fiduciary, and whose only compensation is for providing advice and investment management. There should be no additional compensation for the products or funds they pick. This is common sense that’s not so common, unfortunately.
Keep in mind that not every fee-based advisor is a fiduciary. Many financial advisors with brokerage firms offer fee-based accounts loaded with proprietary mutual funds that have high fees and outsized expenses they charge back to investors.
You’re on the right track when you find an actual RIA. But make sure he or she is unaffiliated with a broker-dealer, and get that in writing. An RIA who is a fiduciary is paid to give advice, pure and simple. A broker, on the other hand, gets paid a commission for selling financial products.
This isn’t an indictment of the many well-intentioned people who are brokers. But at the end of the day, many of them work for firms that have a vested interest in making as much money as possible for themselves and their shareholders—not for you, their client. By contrast, a fiduciary advisor must put your interests first.
Does it make that big a difference in the end? Consider this, according to America’s Best 401(k): Two neighbors who invest the same amount and generate identical investment returns over 30 years will have wildly different outcomes, depending on how much they each pay in fees.
Assuming 8% gross annual returns, the neighbor paying 1% in fees will have 76% more money on the day he retires than the neighbor paying 3% in fees. The person with the higher fees will run out of money more than two decades earlier, assuming both withdraw from their accounts at the same rate.
Most of us need help with investing and financial planning because it’s complicated. Make sure you’re getting the right help. Get a second opinion, just like you would before making a life-changing medical or legal decision. Find a fiduciary who will review your entire financial picture and point out red flags.
Above all, don’t be a passive bystander to your financial future: Be the chess player, not the chess piece, by learning the rules of the game and taking charge.
Robbins is a board member and chief of investor psychology at Creative Planning, Inc., an SEC Registered Investment Advisor (RIA). He receives compensation for serving in this capacity and based on increased business derived by Creative Planning from his services.