The Obama administration announced on Wednesday a new rule on investment advice that may change how millions of Americans choose their retirement investments — potentially saving them billions of dollars in the process.
By requiring all financial advisors to act in their clients' best interests, a criterion known as the fiduciary standard, the rule aims to protect investors from conflicted investment advice when they are exiting a workplace savings plan like a 401(k) and transferring their money into an IRA.
"American families are losing billions of dollars because of an out-of-balance system," said Labor Secretary Thomas Perez in a news briefing. "With the finalization of this rule, we are putting in place a fundamental principle of consumer protection in the retirement landscape."
The rule will take effect in stages beginning in April 2017, Perez said. But that time is unlikely to pass quietly, not least because various financial industry groups have vowed to fight the rule.
For many, retirement savings decisions are some of the most important financial choices they ever make.
According to an estimate by the Council of Economic Advisers, a worker who rolls over 401(k) savings to an IRA at age 45 and followed conflicted advice could have 17 percent less savings by the time he or she reaches age 65. In all, it estimated that conflicted investment advice currently costs savers roughly $17 billion a year.
Opponents of the rule say that estimate may be woefully high, yet David Certner, legislative policy director for government affairs at AARP, thinks the cost could be even greater because the council did not examine conflicts in the insurance market.
No matter the exact figure, the costs are hitting savers at a time when millions are facing retirement with little in the way of financial resources. Only 25 percent of workers report feeling on track with retirement savings, according to the Employee Benefit Research Institute, and 60 percent say they are behind to some degree.