Self-Directed retirement investing means the saver chooses their own assets and directs a custodian to fund these choices. Self-directed IRA providers are not fiduciaries in that they do not provide investment advice.
For those with market-correlated investments, President Joe Biden’s proposed new retirement rule covers certain concerns. The proposal is centered on enhancing the fairness and security of financial advice provided to Americans for retirement savings. Here’s a breakdown of the key aspects of this proposal, as reported by various sources:
Department of Labor’s Proposal
– Objective: The proposal from the Department of Labor seeks to close governance loopholes and mandates that financial advisers provide retirement advice in the best interests of savers, rather than pursuing the highest possible earnings for themselves.
– Issue with Current Practices- Currently, some financial advisers prioritize their self-interest, possibly recommending investment products that offer them higher commissions (sometimes as high as 6.5%) even if these products yield poor returns for the clients. This misalignment of interests can be detrimental to retirement savers.
– Impact on Savers: Bad financial advice can cost a retiree up to 1.2% per year in lost investment, which over a lifetime, could reduce their retirement savings by up to 20%. For a middle-class household, this could translate to a significant loss, potentially tens of thousands of dollars over time.
– Example of Problematic Products: Fixed index annuities were highlighted as products with conflicts of interest, costing retirement savers up to $5 billion per year due to their hidden fees and often misleadingly low returns.
New Rule to Protect Retirement Security
– Fiduciary Duty: Under the proposed rule, all financial advisers giving retirement advice and selling retirement products would have a fiduciary duty to act in their clients’ best interests.
– Existing Regulations: Many advisers are already under this fiduciary duty as per the Employee Retirement Income Security Act of 1974 (ERISA). However, current regulations like the SEC’s Regulation Best Interest (Reg BI) do not always extend to certain commodities or insurance products.
– Closing Loopholes: The new rule aims to close these loopholes, ensuring that the same fiduciary standards are upheld across all forms of retirement advice, whether it involves securities or insurance products.
– Penalties for Breach: Advisers who fail to adhere to their fiduciary duty under the new rule could face serious consequences, including the need to pay restitution and additional financial penalties.
Improving 401(k) Advice
– Legislative Context: The administration also seeks to build on previous legislation to protect workers when they enroll in new employer’s 401(k) plans.
– Focus on One-Time Advice: Currently, advice provided on a one-time basis, such as rollover assets from a 401(k) plan into an IRA, is not necessarily required to be in the saver’s best interest. The new rule would ensure that such advice is aligned with the saver’s best interest.
– Impact on 401(k) Rollovers: In 2022, Americans rolled over approximately $779 billion from defined contribution plans like 401(k)s into IRAs. The new rule seeks to safeguard these transactions.
Broader Implications
– Support from AARP: Organizations like AARP have expressed support, emphasizing the need for financial advisers to act solely in the best interests of their clients, especially considering the vast number of people with retirement accounts.
– Context of Consumer Protection: This move is part of a broader initiative by President Biden and his administration to protect consumers and ensure fairness in various sectors, including rental housing and corporate mergers. The administration is taking steps to tackle hidden fees and anti competitive practices in different markets.
In essence, Joe Biden’s proposed new retirement rule is a significant step towards ensuring that financial advice given to Americans about their retirement savings is more transparent, fair, and aligned with their best interests. It addresses longstanding issues in the financial advisory sector, particularly around conflicts of interest, and aims to provide better security for Americans’ retirement savings.
For information on self-directed retirement investing, where you choose your own “non-market correlated” assets, reach out to uDirect IRA Services at info@uDirectIRA.com
