We know of many people who are enrolled in their employer-sponsored 401(k) type plan but who are completely at sea when it comes to allocating their retirement savings. They are grateful for the benefit, but they often end up basing their investment decision on well-intentioned but arbitrary criteria. The fund is based here in Milwaukee? Check. My brother-in-law mentioned this fund over dinner one night? Check.
For several years, consumers have not been able to consult with fiduciary investment advisers because of potential conflicts of interest for the advisers. The rule came about because unscrupulous advisers were recommending funds that they had some kind of financial stake in. So, Bob Adviser would go through the list and choose only the funds that paid him or his company, Investment Advisers-R-Us, a fee for signing up customers.
Clearly, such a practice was not serving the best interest of the consumer. When you’re talking about protecting people’s retirement savings, the government will not hesitate to step in. In 2006, Congress voted to prohibit these transactions under the Employment Retirement Income Security Act and the Internal Revenue Code.
The U.S. Department of Labor’s Employee Benefits Security Administration has issued a new regulation designed to address the issue. According to the fact sheet, the agency oversees more than $2.2 trillion in private sector, 401(k) type retirement plan assets on behalf of 60 million active participants. With that kind of money at stake — and with the knowledge that government programs could shrink significantly in the future — EBSA decided that professional investment advice would probably be a good thing.
The new rule won’t just open wide the doors to investment advice companies, though. That would just put everyone right back where we started. So the agency has imposed some safeguards, which we will discuss in our next post.
Source: U.S. Department of Labor, “US Labor Department publishes final regulation to improve access to quality investment advice,” Oct. 24, 2011