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Why Retirement Investment Advice Laws Need to Be Updated

Today's workers need to make every dollar of their retirement savings count. Traditional defined-benefit pension plans that once took the worry out of retirement planning are an endangered species for most workers, outside of public-sector jobs, like teaching and public safety. Instead, many Americans try to put away money in a 401(k) or other retirement savings account, bearing all the responsibility and risks of building adequate retirement savings.

As a result, workers face ever more complicated decisions about their financial security in retirement: choices about how much to save, how to invest those savings, what to do with the savings when they change jobs and how to manage the money once they retire. Increasingly, Americans seek out professional financial advisers to help navigate these complex choices.  And they expect the advice they get will be in their best interest. They assume rules are in place that protect individual retirement investors and their hard-earned savings.

Here's the problem. The existing rules that govern retirement investment advice were written nearly 40 years ago when there were no 401(k) plans and almost no one had money in an individual retirement account (IRA). The retirement income landscape has changed radically since the 1970s, but the rules that govern who gives and profits from investment advice have not kept up. 

Right now, under the federal pension law—the Employee Retirement Income Security Act of 1974 (ERISA)—it is perfectly legal for some professionals who are providing investment advice to put their own financial interest first by promoting investments that earn them hefty fees and high commissions. Many Wall Street investment firms take advantage of the outdated rules by paying financial advisers in ways that deliberately pit an adviser's paycheck against retirement investors' best interests. In this way, an adviser can earn double or triple in pay by advising investors to pick one option over another. These high fees and commissions deplete investors' retirement accounts like a slow leak in a tire.

The retirement hopes of millions of Americans are harmed by conflicted investment advice each year, and they don't even know it.

Here is an example from the U.S. Department of Labor that illustrates how the high fees and expenses that result from conflicted investment advice can impact you:

Assume you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000.

In this case, Wall Street would take $28 in fees out of every $100 in potential retirement savings.  By contrast, if financial advisers put investors' interests first, costs would be lower and performance would improve. Over a lifetime of work, this can add up to tens or even hundreds of thousands of dollars in additional retirement savings.

New Investment Advice Protections

The Labor Department recently proposed new and long overdue rules to ensure that all financial professionals have a legal obligation—known as the "fiduciary duty"—to put the interests of their clients first when they offer retirement advice. Workers and retirees will benefit from these new protections whether their retirement savings are in a 401(k), an IRA or a traditional pension plan. Done right, these rules will close the loopholes that now exist for deceptive and self-dealing practices by financial professionals and put more Americans on the road to a decent, financially secure retirement.

Opponents Poised to Kill These New Protections

Wall Street firms have invested heavily in a lobby campaign to defeat the new protections on retirement savings. They were successful in 2010, when the Labor Department initially made an effort to modernize rules governing investment advice, and they hope the Republican-controlled Congress will throw up a road block once again.

With more than 90 million workers participating in 401(k) or other defined contribution plans and with $7 trillion invested in IRAs today, is it any wonder that Wall Street firms want to limit consumer protections so they can continue to skim off retirement savings?

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