Just because the government has shut down doesn’t mean Congress will cease its central function of making Americans’ lives miserable. While everyone watches the legislative back-and-forth on the budget, the House may vote this week to thwart a key new Labor Department protection affecting $10.5 trillion in retirement funds. Basically, House Republicans want to allow the financial services industry to continue to steal from your 401(k) and IRA plans. And far too many Democrats want to help them.
The Labor Department proposal, known as the “fiduciary rule,” would change the ethical standards by which employer-based retirement products like 401(k)’s and IRAs are marketed and sold. The rule has not been updated since 1975, before 401(k)’s and IRAs even existed. The Labor Department wants to broaden the definition of a “fiduciary” to cover all financial advisers who offer individual investment advice for a fee. Under the rule, they would be legally required to work in the best interest of their clients. For example, a fiduciary would not be able to push investment products on customers in which they have a financial stake. The agency defines the goal of the proposal as “to ensure that potential conflicts of interest among advisers are not allowed to compromise the quality of investment advice that millions of American workers rely on, so they can retire with the dignity that they have worked hard to achieve.”
The short version here is that when the country turned away from guaranteed pensions in the 1980s and started encouraging individual employees to gamble with their retirement nest eggs on the stock market, it also threw them into the arms of a predatory financial services industry. And it’s a big business; IRAs and 401(k) plans hold roughly $10.5 trillion in total assets.
Currently, it is depressingly common for financial advisers, more than 80 percent of whom are not fiduciaries, to self-deal when offering advice. First off, they obtain large fees from the retirement products they sell. According to the think tank Demos, a median-income, two-earner household will pay $155,000 during their lifetime to financial advisers on average. (The lifetime gains for two-earner households from retirement accounts are around $230,000, meaning that nearly two-thirds of the profits go to the industry.) Second, non-fiduciary financial advisers can enjoy kickbacks; right now there is no rule against an adviser from a mutual fund company encouraging clients to put their money in specific funds sold by that company. In fact, that’s the norm, and the adviser typically receives a commission for the sale.
