Subscribe

Roth IRA, retirement products face crackdown from the Obama administration

Roth IRAs and other retirement plans can cost Americans $17 billion every year when sold by brokers with conflicts of interest, according to a White House report. For example, a worker who rolled a $100,000 401(k) into an Roth IRA at age 45 could lose $37,000 in potential earnings by age 65 because of such conflicts. 

  • close
    Labor Secretary Tom Perez, left, and Sen. Elizabeth Warren, D-Mass., listen as President Barack Obama speaks at AARP in Washington last month. The Obama administration recently unveiled new rules cracking down on brokers who sell retirement products, like Roth IRAs, with conflicts of interest, like getting a cut from a company for pushing certain services.
    Jacquelyn Martin/AP/File
    View Caption
  • About video ads
    View Caption
of

Brokers with conflicts of interest cost American investors with IRAs or other retirement plans as much as $17 billion every year, according to a report released Monday by the White House Council of Economic Advisers.

The report came as the Obama administration announced plans to crack down on those advisors with rule changes that would require them to act in the best interest of investors, not those who may be paying them on the side.

“If you are working hard, if you are putting away money, if you are sacrificing that new car or that vacation so you can build a nest egg for later, you should have the peace of mind of knowing that the advice you are getting for investing those dollars is sound,” Obama said Monday afternoon in a speech to the AARP in Washington. “These payments … incentivize the brokers to make recommendations that generate the best returns for them, but not necessarily the best return for you.”

Recommended: Retirement planning: Six myths, busted

The economic advisors survey, which focused on individual retirement accounts, found that “conflicted advice” costs savers about 1% annually. So, for example, an account that would have delivered a 6% return one year would instead deliver a 5%.

An estimated $1.7 trillion is invested in potentially conflicted accounts, according to the report.

In an example provided by the White House, a worker who rolled a $100,000 401(k) into an IRA at age 45 could lose $37,000 in potential earnings on that account by age 65 because of conflicts of interest by an advisor.

“Many Americans rely on professional financial advice when they make decisions about their retirement savings,” Richard Cordray, director of the federal Consumer Financial Protection Bureau, said at the AARP event. “So it is critical that when they seek out professional guidance, they can trust the financial advisor to put the consumer’s interests first.”

According to the White House, financial advisors today may legally accept “backdoor” payments or other hidden fees for directing investors toward savings plans that may not be in their best interest. Current regulations state only that they must recommend “suitable” retirement account options.

Obama is directing the Department of Labor to begin making new rules to govern such behavior. The Labor Department’s initial proposal would require brokers who sell stocks and other investments to let their clients know if they receive any fees or other payments for recommending certain plans.

The rules determining how retirement plans are handled have not been updated for 40 years, according to the Labor Department. When the 1974 Employee Retirement Income Security Act was passed, workplace pension managers were more often responsible for making plan decisions than outside advisors, the department says.

The monthslong process will include a period for the public, and, of course, the finance industry, to have input on any proposed changes.

This isn’t the first time Obama has attempted to rein in such conflicts. He proposed a similar rule change in 2010, but withdrew it the following year after fierce opposition from finance industry groups.

Those groups argued that the rules would have hurt investors by reducing their investment options.

The Christian Science Monitor has assembled a diverse group of the best personal finance bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link in the blog description box above.

About these ads
Sponsored Content by LockerDome
 
 
Make a Difference
Inspired? Here are some ways to make a difference on this issue.
FREE Newsletters
Get the Monitor stories you care about delivered to your inbox.
 

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...

Save for later

Save
Cancel

Saved ( of items)

This item has been saved to read later from any device.
Access saved items through your user name at the top of the page.

View Saved Items

OK

Failed to save

You reached the limit of 20 saved items.
Please visit following link to manage you saved items.

View Saved Items

OK

Failed to save

You have already saved this item.

View Saved Items

OK