Across the country, millions of hardworking families and individuals struggle to determine what investments to make and how to save for their retirement. Unfortunately, a new regulation from the Obama administration is about to make planning for retirement even tougher for these savers. Earlier this year, the Department of Labor finalized a new rule – known as the fiduciary rule – that would place a major roadblock in the path to retirement for American savers, increasing the cost and complexity of seeking retirement advice from a financial advisor.
Under the new rule, financial advisors will be burdened with increased compliance considerations and greater legal liability, which will in turn increase the cost and restrict access to affordable retirement advice for many hardworking Americans. After a similar exercise in U.K., a recent report released by the U.K. Treasury found exactly the result that many fear will occur in American retirement markets under the new rule: “advice is expensive and is not always cost-effective for consumers, particularly those seeking help in relation to smaller amounts of money or with simpler needs.”
Even after considerable changes between the proposed and final versions of the rule, questions regarding the possible advice gap for low and moderate income individuals remain. So it is not surprising that, over the last couple of weeks, representatives of the business community and financial industry have filed lawsuits challenging the Department of Labor’s fiduciary rule.
For those of us who are interested in increasing retirement savings and keeping this savings intact until retirement age, there are two important issues: (1) how assistance regarding distribution options is handled when someone is leaving their job and (2) what does the rule mean for small businesses which represent 99 percent of U.S. employers.
Short job tenures, especially among millennials, are rampant and require making decisions about what to do with retirement assets that were accumulated with previous employers. Many young workers take the path of least resistance and “cash-out” their retirement accounts, especially when account balances are low.
Financial advice becomes crucial at this point. Research shows that employees are less likely to take cash distributions if they are guided by financial advice. A closer look at the DOL’s final rule reveals that this assistance will technically not be available for small savers. To give advice on distribution options, an individual advisor is required to be financially indifferent in suggesting rolling these assets between his or her own firm and a competing firm, which is not a realistic expectation. However, the rule does permit solicitation by registered investment advisors who naturally gravitate towards high balance investors due to their higher cost structure. There is no doubt putting hurdles to financial assistance for smaller accounts could spell trouble for these account owners in their retirement years.
Further, if the Labor Department’s rule is implemented it will adversely impact small businesses and their employees who rely on financial advisors to help them set up their retirement plans. Financial advisors who serve small plans will face increased costs and compliance requirements under the regulation, causing many advisors to stop servicing the retirement plans offered by small businesses altogether. This will reduce the retirement savings options available to current small business employees. For these employees, their retirement account is often their main access to savings and yet the Department of Labor is making financial advice and cost effective plans even farther out of their reach.
A comprehensive retirement policy designed to maintain growth in savings, expand coverage, and prevent leakage during job changes is important for retirement security. The final fiduciary rule does not seem to fit the bill. As President Obama stated eloquently “For Americans who are doing the hard work of saving for retirement, let’s make sure that they get a fair deal.”
Dr. Pinar Cebi Wilber is a senior economist at the American Council for Capital Formation, a nonprofit, nonpartisan organization advocating tax, energy and regulatory policies that facilitate saving and investment, economic growth and job creation.