New Retirement Regulations and What They Mean

May 02, 2016

Do you have a financial advisor helping you invest your retirement savings? If so, how sure are you that the advice you’re getting is really in your best interests, rather than in your advisor’s best interests? New regulations adopted by the U.S. Department of Labor are aimed at making the answer to that second question clearer.

 There are lots of ways an advisor’s financial interests might diverge from yours. For example, the advisor might stand to make money, in the form of commissions or other payments, for steering you into certain kinds of investments, or convincing you to roll your savings over from a former employer’s plan to an individual retirement account—or IRA—even if it’s not the best choice for you. The White House Council of Economic Advisors estimates that conflicted advice costs Americans $17 billion a year in retirement savings.

When the new Department of Labor regulations go into effect, starting in April 2017, anyone who gets paid for providing retirement-related investment advice will be considered a “fiduciary,” meaning they will be required to act in the best interests of the customers they advise. The regulations include those who advise retirement plans themselves, but also anyone who advises individuals about their retirement investments in vehicles such as 401(k) plans and IRAs.

In addition, if a financial advisor wants to recommend any conflicted investments, meaning those that offer the advisor financial incentives, the advisor will have to sign a contract with each customer, promising to act in the customer’s best interests. The rule also requires the advisor to disclose information about the commissions or other payments that create the potential conflict with customers’ interests.

Just as importantly, the regulations aim to give each retirement investor a clear path for seeking relief in court if it turns out an advisor was not acting in the customer’s best interests. For investors in employer-provided plans, that path will generally be to sue under ERISA, the federal law that regulates such plans. For IRA investors, it will often mean suing for breach of the best interest contract the advisor was required to sign.

The new regulations are the result of a seven-year process that involved lots of back and forth between the Labor Department and the financial services industry, consumer protection groups, academics, and others. Some industry players fought tooth and nail against the new rules, while others were more willing to accept them.

That rough division seems to reflect a deeper truth about the people and companies that provide advice about retirement investments. Some advisors already keep their customers’ best interests front and center, working diligently to craft an appropriate mix of investments for each customer. Other advisors routinely let their own financial incentives influence the advice they give their customers. That might not mean those advisors are giving terrible investment advice. But it all too frequently means they give less than the best advice, for example by causing their customers to pay fees or other expenses they could have easily avoided.

The idea behind the new regulations is to force the bad guys to clean up their acts, so the good ones will be able to compete on a level playing field, and you will have a better chance at getting the advice that’s best for you.