A majority of the retirement savings used to consist of pensions and defined benefit plans. Unfortunately, while the goal of these plans was to reduce costs for employers they actually increased cost and created unaffordable expenses. These plans became too costly for many companies to continue offering forcing them to look for other ways to fairly compensate employees. This led to the introduction of defined contribution plans such as 401(k)s and other qualified savings plans that are used in many businesses today.
As employees retire or change jobs, they are left with deciding what to do with their 401(k) savings. When looking for guidance, consumers seek the counsel of investment professionals who may be acting under the “suitability standard”. The term “suitability” was deemed appropriate if an investment recommendation met a client’s need. These recommendations may include an annuity with an expensive rider, front or back-loaded mutual funds, or various life insurance plans. However, this resulted in a retiree rolling their 401(k) to an IRA and investing their savings in what can actually be very costly. As these investment choices have been around for a long time, consumers and regulators began to question whether these benefit plans are in the best interest of the consumer or the sales person selling the products?
As a result, the Department of Labor created a new fiduciary rule for IRAs and 401(k)s which is expected to go into effect in April of 2017. The new rule will require any financial professionals who recommend investments or invest money for IRAs and 401(k)s to be a fiduciary. This means that all financial professionals working with IRAs and 401(k)s will be required to act in the client’s best interest while abiding by legal and ethical standards. If financial professionals choose not to work at a fiduciary level, they must properly disclose that and any other information pertaining to that such as fees, expenses, or other conflicts of interest.
With the onset of this rule, it will require advisors to sign a best interest contract, pledging the advisor will act in their best interest and only receive reasonable compensation. Thousands of firms will have to adjust their operations and procedures to comply with the rule. At CPS Investment Advisors, we pride ourselves on having operated as a fiduciary for years and have always acted in the best interest of our clients. We will continue doing so and maintaining trustworthy, dependable relationships.
If you are considering changes to your IRA or your 401(k) plan, we encourage you to speak to an advisor who follows this fiduciary standard. Ask questions about your investment choices and how those providing the advice are being compensated. If they are accepting a commission, then it is questionable whether they are acting as a fiduciary in your best interest.
Sources: Investopedia, Investment News, Forbes