Advice abounds when you are putting money into a 401(k) savings plan. You get a bunch of informational flyers, your employer urges you to save, and may even automatically enroll you or match your contributions.
Yet when you prepare to retire, it's a different story. For one thing, you have the option to roll your 401(k) plan into an Individual Retirement Account. And not every financial professional who offers to help at that point will have your best interests in mind.
That may soon change. The Labor Department is expected to release new rules on standards for investment advice as soon as early April. The rules are likely to require all investment advisors, including broker-dealers and insurance agents, to act in investors' best interest when advising them on what to do with their 401(k) savings plans.
Currently, certain advisors may tell you to invest in a high-cost or low-performing fund even when a better option is available, as long the recommendation is deemed to be "suitable" for you based on certain broad criteria. It's also permissible if that investment nets the advisor higher commissions.
With the new conflict of interest standard applying to all advisors, however, that will no longer be possible.
The current system has proven expensive for investors, not least because many people have difficulty determining which standard their advisors are using. That confusion costs investors roughly $17 billion annually in higher fees or sub-optimal investment performance, according to an estimate by the Council of Economic Advisors.
"When you get bad advice, you are paying for it," said Cristina Martin Firvida, director of financial security and consumer affairs at AARP, the advocacy group for older Americans.
AARP is among those pushing for the change. On the other side are parts of the financial services industry and the U.S. Chamber of Commerce. For example, the Securities Industry and Financial Markets Association have argued vehemently against the proposal, helping to beat back an earlier version that the Labor Department proposed in 2010. The Chamber is also strongly opposed, and its president has said a lawsuit over the new rule is possible.
Brokers and the associations representing them argue that adhering to the tougher fiduciary standard would prove so costly and unwieldy that small investors would be shut out from investment advice.
"This will be operationally very difficult and near impossible to put in place to help serve our clients," said Lisa Bleier, managing director of savings and retirement at SIFMA.
Yet AARP's Firvida says the rule change will benefit consumers.
"I think ultimately, conflicts of interest are going to be eliminated," she said. "I really do believe people saving for their retirement will end up with advice that is in their best interest because it's common sense."
The 'Wild West' of IRAs
The Labor Department's action is coming at a time when the national conversation about retirement savings is changing.
For decades, policymakers, employers and financial institutions have focused on encouraging employees to put money away in defined contribution plans such as 401(k) plans. But now, experts are realizing that when people retire and depend on those assets for their retirement security, they need more impartial guidance than the current system provides.
"IRAs are essentially a Wild West. Anything goes," said David Laibson, an economics professor who has studied the effects of cognitive changes on financial decision-making ability.
"The vast majority of American households don't know enough about the asset management industry to make sophisticated choices in the IRA market. They are ripe for ripoffs, and that gets more likely as they age," he said.
In some cases it may make more sense for 401(k) account holders to simply leave their money there when they retire or change jobs, Firvida said. While a company plan may or may not offer the best investment options for retirees, at least there are fiduciary protections that apply.
"There is definitely a sentiment among some in the Department of Labor that, at least for some employees, it would be better to leave the money in the plan," said Pamela O'Rourke, senior vice president and senior counsel at Integrated Retirement Initiatives. "Once it comes out of the plan, individuals are often on their own."
By setting new standards for investment advice, the rule may provide added safeguards for investors. The shape and form of the new proposal are still unclear. But with assets in IRA and 401(k) accounts at close to $14 trillion, the retirement market is an important part of the financial services industry. The fight over how best to work with these investors is far from over.