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Proposed new federal rules would extend fiduciary laws to 401(k) rollovers


Should consumer protection fiduciary laws in place for 401(k) and pension plans be extended to rollovers and IRAs? A proposed new Department of Labor regulations would require all investment advisers to put the financial interests of their clients first when providing 401(k) rollover or IRA investment advice.

Supporters say the new rules would save retirement investors about $17 billion per year in unnecessary fees and commissions. Critics say it is a prime example of government overreach as the 700 pages of regulations are too complex and costly.

A two-week public comment period opened Sept. 8 regarding the new DOL regulations proposed by the Obama administration. Mercer E. Bullard, a professor at the University of Mississippi School of Law who advocates mutual fund reform through the organization Fund Democracy, LLC, has been involved in the rule making, including testifying in Congress about it Sept. 10. He is a firm advocate of the changes.

“In my view, it is a long overdue reform that will reduce financial advisors conflicts of interest and result in better advice for investors, especially with respect to 401(k) rollovers,” Bullard said. “There have been instances where investors lost substantial amounts of retirement savings pursuant due to bad advice for the 401(k) rollover. When you leave your employer, you can roll over your 401(k) into an IRA. Eventually, the majority of the 401(k) is in retirement assets, but they haven’t been regulated as retirement assets. DOL regulations would treat them like the retirement assets they are.”

Bullard said the industry has pulled out all the stops in lobbying Congress to stop the rulemaking.

“People should write in to support the rule to fend off the interests of Washington, D.C., lobbyists,” Bullard said.

Secretary of Labor Tom Perez said the rule changes are the best thing that could happen to help Americans save for retirement.

“This boils down to a very simple concept: if someone is paid to give you retirement investment advice, that person should be working in your best interest,” Perez said. “As commonsense as this may be, laws to protect consumers and ensure that financial advisers are giving the best advice in a complex market have not kept pace. Our proposed rule would change that. Under the proposed rule, retirement advisers can be paid in various ways, as long as they are willing to put their customers’ best interest first.”

Currently most retirement investment advisers make commissions on sales of retirement products. Account holders are also charged annual, which can mount steadily and erode savings. Yet deciding what to invest in can be a complex decision beyond the abilities of the average investor.

An option could be for retirement investors to charge an hourly rate to clients. A major advocate for the new rules is Sheryl Garrett, CFP, who is a director of The Garrett Planning Network, which has a nationwide membership of over 300 independent, fee-only financial planners who provide advice without minimum account requirements, sales commissions, or long-term commitments.

“Our members proudly embrace their fiduciary duty, always placing their clients’ best interests first,” said Garrett, who is based in Arkansas. “If you need only 20 minutes of investment advice, that is all you pay for. If your needs are more complicated, you still likely pay far less than with a sale based on a commission.”

Bullard said Garrett manages a group of financial planners who provide services to clients in a way most brokers say is not possible.

“Obama has met with her,” Bullard said. “She is a national figure on this issue.”

Garrett frequently testifies as an expert witness in cases where investors believe they have been harmed by advice from investment advisers who feathered the nest of the brokers and their companies instead of serving the retiree’s best interests. Garrett has been retained by the Commonwealth of Massachusetts as an expert witness for a case that has received national attention regarding Ethyl Sprouse losing $400,000 from her retirement account. Sprouse said her stockbroker put her funds into high-risk stocks despite her asking for low-risk investments. The Sprouse case has been profiled on CBS News.

Garrett recommends visiting SaveOurRetirement.com for more information and then clicking on the “Take Action” tab to provide your own comment to the lawmakers and the DOL. Garrett said despite what the lobbyists are saying about how the regulations would harm investors, failure to provide protection means that the salesperson and their firm will continue to put their financial interests first.

Garrett, who testified in DOL hearings on this issue Aug. 11, said one industry group alone–the National Association of Insurance and Financial Advisors–has spent about $2.5 million this year lobbying against the DOL’s Conflict of Interest rule. Garrett said incentives to sell products often conflict with best-interest advice to clients.

Garrett recommends asking if your investment advisers has signed or is willing to sign the Committee For The Fiduciary Standards’ Fiduciary Oath (http://www.thefiduciarystandard.org/wp-content/uploads/2015/02/fiduciaryoath_individual.pdf).

“If they refuse to put your financial interests first, do you really want them as your adviser?” Garrett asks.

She estimated that of 700,000 investment advisers in the U.S., only about 100,000 are registered investment advisers currently required by law to follow the fiduciary principals outlined in the oath. It is more difficult for people who want to recoup losses from bad advice to mount a successful complaint or court challenge if their advisers have not agreed in writing to put the client’s financial well-being first.

Garrett said some of the most costly mistakes many people make is purchasing investment products with a commission of seven to 11 percent or rolling over a pension plan as a lump sum distribution when a monthly cash flow is needed. She often instead recommends commission-free, low annual fee mutual funds or Exchange Traded Funds (ETFs) such as those offered by Vanguard and TD Ameritrade.

Opponents of the rule-making are lobbying Congress to stop the rules through budget making, possibly holding up a new budget until efforts are dropped to adopt the proposed new regulations. No Republican lawmakers have expressed support for the proposed rule.


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