You might not have noticed the seismic shift in your world last week, but something big happened that could make the last 40 years or so of your life a lot less stressful. After years of battling, arguing, and dithering, a new law went into effect that prohibits your financial advisor from trying to sell you on all sorts of expensive nonsense in your retirement account.
I admit this news doesn’t have the drama of a 3am White House tweet or the pathos of a celebrity death. But it does shine some light into one of the sleaziest corners of our nation. You see, when we added 401k plans to our tax code years ago, it was to give wealthy workers a tax break on their extra savings (most workers relied on pensions and social security for retirement). These lucky CEO’s had “investment guys” who sold them on the latest and greatest deals over a round on the 9th hole or drinks at the steak house. Sometimes the CEO made out well; sometimes he didn’t. But his investment guy always got paid and got paid even better if he sold the stuff with the highest commissions. Aside from the occasional fraud and embezzling case, no one was that bothered. Frankly, our hypothetical CEO probably didn’t need all of his money, and anyway, he wasn’t going to admit it to his buddies if the account performance wasn’t as great as had been promised.
A few decades later and this little game has had devastating consequences. The workers putting money in those 401k’s are now people who actually need their savings to take care of basic living expenses. Worse yet, they often don’t get a say in who is managing their 401k accounts—that choice is still being made by an executive somewhere. To rake a little more profit off these “small” accounts, investment guys (now “financial advisors”) are still piling on the high-commission products wherever they can. Which soon will mean a significant number of elderly people in our country who struggle to make home repairs and buy groceries. (And before you start to feel smug about your educator’s 403b account, those are often worse).
So when I say that the new fiduciary law is a big deal, I mean “big” to the tune of $491 million dollars in the state of Massachusetts alone. That is how much the Economic Policy Institute estimates Massachusetts retirement savers have been losing to unnecessary fees and commissions every single year. Painful, isn’t it?
I do believe that financial advisors can be a good value, providing services that both earn and save you many times over what you pay in fees. (I would find another career if I didn’t). But financial advice doesn’t work when the advisor is just a salesperson in disguise. Here is hoping that this much-needed new law sticks.
For more on the new law (and the ongoing battle from financial services) check out:
Sen. Elizabeth Warren, “Saving for Retirement Just Got Easier,” Boston Globe, June 12, 2017. (http://www.bostonglobe.com/opinion/2017/06/12/saving-for-retirement-just-got-easier/dRylOldCcvco87d947UCaO/story.html)
“DOL Fiduciary Rule Explained as of June 9, 2017” Investopedia, June 9, 2017. (http://www.investopedia.com/updates/dol-fiduciary-rule/)
And for a story on what the laws still need to cover (but don’t):
Tara Siegel Bernard, “Now Your Financial Advisor Will Have To Put You First (Sometimes)” New York Times, June 8, 2017.