THE PROBLEM
If you are like most Americans, you're facing difficult questions about how to save for a decent retirement, such as—
1.
How much do you need to save?
2.
Who should you turn to for advice, and what should you invest in?
3.
When leaving your job, should you leave. your money in a 401(k) or roll it over to an IRA?
The Department of Labor (DOL) has proposed a Retirement Security Rule to close loopholes in exiting protections for retirement investors so that your retirement security is better protected. Those rules haven’t been changed in 50 years, even though the way Americans save and invest for retirement has changed dramatically. Reliable pensions that once took the worry out of retirement planning are disappearing, and workers and retirees today have to manage their own 401(k)s and IRAs to make ends meet in retirement. With so many complicated investment choices to make, Americans need reliable advice they can trust.
Thanks to loopholes in the rules that govern advice about retirement investing, financial professionals are able to portray themselves as trusted advisers while acting as self-interested salespeople.
They can recommend investments with higher fees, riskier features, and lower returns because they earn more money, even if those investments are not the best choice for you. That means that the financial professionals you turn to for advice can end up costing you many thousands of dollars in lost retirement savings.
Millions of retirement investors who have been saving for years could lose up to 20% or more because of bad advice — which costs a typical saver $15,000.
What problems have current loopholes created?
Rollovers are the single most important financial transaction some people make, but because advice retirement investors receive about rollovers may be considered “one time” rather than “regular” advice, an adviser may not be required to put your financial interests first and can provide conflicted advice - without ever bothering to check on your financial situation, “advisers” may recommend that you roll over your 401(k) savings into an IRA where in fact the investment expenses you pay are higher than those in your 401(k). Firms and investment professionals often have strong incentives to recommend rollovers because it can mean a big pay day for them.
While the Securities and Exchange Commission (SEC) finalized Regulation Best Interest (Reg. BI) in 2019 to enhance the standard of conduct for broker-dealers, this standard does not apply to all investment professionals, all products, or all accounts. Specifically, Reg BI is limited to recommendations to retail customers about securities. Thus, recommendations about non-securities, such as some insurance products, real estate, futures or options, precious metals, or cryptocurrency offerings are not covered. Similarly, to the extent an investment professional provides recommendations to retirement plans, which do not meet Reg. BI’s definition of retail customer, Reg. BI doesn’t apply.
The National Association of Insurance Commissioners (NAIC) adopted updates to its Annuity Transactions Model Regulation (#275) in 2020, but it is a meaningless standard. It is a much lower standard than the one Reg. BI places on broker-dealers and remarkably excludes both cash and non-cash compensation from its definition of “material conflict of interest.” As a result, the NAIC Model Rule does not require investment professionals recommending annuities to mitigate their compensation-related conflicts. This fractured regulatory environment has created uneven protections for investors and loopholes in the regulation of annuities, where annuities that are regulated as securities are subject to Reg. BI while annuities that are not regulated as securities are subject to the weaker NAIC Model Rule.
Employers who sponsor plans for their employees often consult financial professionals about which products or plans to include in those plans. However, as institutional investors, the advice they receive is currently not covered under a best interest standard, and studies have shown that such advice can lead to poor fund performance and inadequate conflict of interest disclosures, affecting returns for their employees.
Because even small differences in costs add up over time, you could lose tens or even hundreds of thousands of dollars in retirement income as a result.
More and more Americans are being hurt by the “Retirement Advice Loophole.” It’s not just workers in their prime earning years. Every day, 11,000 Americans reach the age of 65. And older Americans are especially vulnerable to lost savings from bad investment advice because for them it’s almost impossible to make up for those losses.
REAL PEOPLE ARE BEING HARMED BY BAD ADVICE UNDER CURRENT REGULATIONS
Jane, teacher in her mid-forties saving for retirement
Jane used to work in corporate America but is now a teacher. A financial professional came to her school to discuss what do to with her previous retirement plan. Jane was in her 30s when this discussion took place.
The professional recommended an annuity with a 14-year surrender period. That means if she changed her mind the first year, she would pay a penalty of 18% that first year. And for 13 more years she would surrender a significant part of her account.
In addition, the funds in the annuity were not diversified and came with high annual administrative fees. This account leaves her with few options and limits the long-term growth of her retirement account.
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This financial professional has not spoken to her since selling this annuity and provided her with no financial plan or support outside of selling her this annuity.
Richard, retired
Navy Lieutenant
Richard had just turned 65. After college he joined the Navy, retiring as a Lieutenant. He entered the private sector and saved to create a retirement nest egg. He was a beneficiary of two very large corporate pension plans and a government pension, which provide retirees a monthly check for life.
Shortly after his birthday Richard got a phone call from an “adviser” who began by asking whether he was confident he’d have enough to live on for the rest of his life. He insinuated that the employers with pensions – one a Fortune 40 company, and the other a Fortune 20 company – might go out of business, taking Smith’s monthly pension payments with them. He asked Smith: “What would happen to you then?”
He urged Richard to take lump sum payouts from his two corporate pensions – well into the six-figures – and roll that into a “guaranteed” annuity in an IRA. Each month, it would pay Richard several hundred dollars less than the pension plan, but, he said, “It would be guaranteed.” He hounded Smith until he rolled one of his pensions into an IRA, ready for that annuity. This was a transaction that could not be undone, and caused irreversible harm to Richard’s long-term financial security. On a rollover into an annuity that paid Richard $300 LESS per month than the pension plans would have, over the next 20 years, the impact of that rollover would cost Richard a whopping $72,000.
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It is too late for Richard, but it’s not too late to close this kind of loophole in which a service provider preys on the fears of people who are retiring – even when their pensions are as secure as these were.
Janice, retired telecommunications engineer
When she retired, Janice's retirement plan gave her the choice of an annuity or a lump sum payout. The advisor she chose recommended that she take a lump sum from her defined benefit plan and roll her 401(k) plan into two individual retirement accounts. The advisor then steered her toward investing a quarter of her total assets in a variable annuity product.
Janice has since had her retirement investment portfolio independently evaluated by another investment advisor who showed her that she was paying fees that she did not know about, let alone understand. According to their analysis, even without the high fees, Janice’s total investment proposal was not well designed in accordance with her best interest - her investments were high cost, and her overall allocation was inappropriate for her long-term goals.
The analysis was most critical of the placement of 25% of her assets in a variable annuity, which had annual fees equal to 3.3% of her investment. Some of those fees purchased complex features that had no value to her. The high annual cost to maintain these investments resulted in a return of barely 0% and Janice would face financial penalties if she decided to move money out of the annuity.
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“I worked long and hard, and saved over my career, so that I could enjoy a decent retirement. And I should have been able to assume that investment advice given to me was crafted solely in my best interest.”