Biden task force: Protect retirement savings by regulating 401k advice
Vice President Biden seeks to regulate the type of advice financial planners offer American workers.
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This proposal would allow financial institutions to give workers investment advice only if they follow one of two customer-protection practices:
1) The advisers do not get extra compensation for steering workers into choices that are more profitable for financial firms, with high fees and expenses.
2) The advice is based on a computer model certified as objective by an independent expert.
The proposals can't guarantee that workers will get good financial advice, or that they will get advice at all. But some finance experts say the move stands to benefit American savers at a time when many are still struggling to recover from the financial crisis.
“These rules will strengthen America’s private retirement system by ensuring workers get good, objective information," said Deputy Secretary of Labor Seth Harris in announcing the proposal with the vice president.
The Biden-led task force released its first annual report Friday, highlighting administration objectives underway on several fronts. These include reviving the job market and helping families with rising costs for tuition, childcare, and care for aging family members.
The proposal on retirement could help on two fronts – improving the advice given and increasing the likelihood that workers will seek professional help in the first place.
In a poll of American adults for Allstate and the National Journal, only 15 percent of respondents said they had "a lot" of trust in financial advisors to help them manage the money risks in their lives. One-third said they had no trust in an adviser.
A separate survey recently tracked the investment outcomes of people who are known to be using some form of professional investment help compared with those who are not. The study, a collaboration between Financial Engines and Hewitt Associates, found that savers earned better returns when they got some help from their 401(k) provider than when they didn't.
From 2006 to 2008, people across different age groups earned annual returns of around 4 percent without help, and about 6 percent with help, the study found. The median annual returns were 1.86 percent higher for people who got help than for those who didn't.
Advice doesn't need to come in the form of meeting in person or by phone. In fact, the Financial Engines survey focused on help provided to 401(k) participants in one of three forms: having their account managed by their plan provider, buying "target-date" funds (in which the fund manager follows what's considered an age-appropriate plan for the participant), or using online advice guides.
The new rule comes at an important time for savers and retirees.
Annual fees remain high for many mutual fund families. Low interest rates have squeezed the fixed-income returns available to many savers and retirees. And despite signs of greater stability on Wall Street in the past year, the investing climate is still fraught with uncertainty.
Many investors have fled to the relative safety of bonds or money-market accounts, yet that strategy imposes its own risk – that the saver will fail to reap gains that substantially exceed inflation.
The new rule to mitigate conflicts of interest, proposed officially by the Labor Department, is available for public comment until May 5. Then the department will issue a final rule.