In 1975, Gerald Ford was president, a first-class stamp cost 10 cents, and 401(k) plans did not exist. Back then, millions of Americans earned a traditional pension after working for decades for one company or industry. This pension provided workers with a guaranteed income stream for the rest of their lives and helped ensure they could enjoy a secure and dignified retirement.
For the vast majority of Americans, that’s not how it works anymore.
We now live in a “do it yourself” retirement world. Those workers who are lucky enough to have a 401(k) plan through their employer must figure out how to best manage their portfolio. The same is true for those workers who are about to retire and roll over their assets from a 401(k) to an IRA or another financial product.
Understandably, many workers and soon-to-be retirees seek out personalized financial advice from professionals and trust them to help navigate these enormously complex and important investment decisions.
There have been dramatic shifts in the way that people save for retirement over the past forty years. But the key rule that is supposed to protect people receiving investment advice was written in 1975, and it has not been updated since.
It’s not just that the rule is decades old; it is wholly inadequate. The rule contains loopholes that allow financial advisors and firms to sidestep their fiduciary duty to act in their retirement clients’ best interest.
In practice, this promotes perverse financial incentives and leads to conflicts of interest in which advisors profit at the expense of their clients. An unscrupulous advisor can easily steer a retirement client to a particular financial product with high fees that will yield a big commission for the advisor even if there may be comparable products—or even better ones—with a smaller commission.
To get away with giving what’s referred to as “conflicted advice” and totally avoiding a fiduciary obligation to a retirement client, all an unscrupulous advisor would need to do is insert a disclaimer that’s typically buried in the fine print of the notice the client receives.
This kind of conflicted advice erodes a worker’s retirement nest egg. In fact, the White House Council of Economic Advisors found that conflicted advice costs retirement plan participants $17 billion in losses every year—which could result in a loss of almost a quarter of a family’s savings over a 35-year period.
As ranking members of three Congressional committees with jurisdiction over these critically important issues, we believe that’s not how it should work anymore.
That is why we strongly support the Department of Labor’s recently finalized “conflict of interest” proposal to update this ineffective 1975 rule. The Department’s effort will help ensure that professionals abide by a fiduciary standard when giving clients retirement investment advice.
In finalizing this rule, the Department pursued an undeniably thorough, thoughtful, and transparent process. It conducted hundreds of meetings and provided the American public nearly six months to weigh in on its draft proposal. We believe the Department’s product reflects the thoughtful input received during the process.
The Department’s proposal will help to ensure that hardworking Americans, who conscientiously set aside money for retirement throughout their entire careers, don’t outlive what they saved. These Americans may not have much experience in managing investment portfolios, so they place their faith and their financial futures in the hands of their financial advisors.
We believe it is reasonable for these Americans to have complete confidence that their advisors will not prioritize higher compensation over their best interest. That is the promise of the fiduciary standard, and it is what the Department of Labor’s “conflict of interest” rule delivers.
Commentary by Bobby Scott, Maxine Waters and Elijah Cummings, members of the U.S. House of Representatives and the top Democrats on the committees on Education and the Workforce, Financial Services, and Oversight and Government Reform, respectively.
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