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 Consumer champion Sen. Elizabeth Warren, who says she is not running
for president, is doing wall-to-wall media on her view that the
government should do more to regulate providers of 401 (k) plans,
403(b) plans and individual retirement accounts.
The Supreme Court heard arguments on Tuesday in a case challenging
high 401(k) fees.
But savers should not pop champagne corks yet. It takes forever and
a day to legislate and regulate in Washington. Even if it ends up on
a fast track, the Labor Department's draft rule is expected to leave
a loophole big enough to drive the brokerage industry through.
Labor Department officials have said it would allow retirement
advisers to continue selling investments on commission, as long as
they disclosed that to clients.
There are several issues involved in regulating retirement
investment advice. A primary one is the quality of 401(k) and 403(b)
plans. Employers, who have a fiduciary responsibility to provide
good plans to their employees, often hand over program management to
consultants, who can keep program costs to employers low and jack up
investment fees that workers pay when they buy funds in their plans.
A second issue involves the quality of advice investors get on their
individual retirement accounts. If the advice is from brokers, there
is a possibility investors are being put into mutual funds that
carry higher fees than are optimal for them or are in other ways
being put into funds that are not right for them. Higher fees may
compensate brokers who are paid by commission or may compensate fund
companies that spend the extra cash in ways that benefit the
brokerage firms that offer their funds. That can result in
investment advice that is conflicted.
After years of lobbying by the brokerage industry, the Labor
Department is leaning toward a rule that would allow conflicts, such
as commissions and fund company payments to brokerages, as long as
they were disclosed. So investors take note: you are eventually
going to have to read all the small print, so you might as well
start now.
Here's how to protect your retirement savings:
- Check your 401(k) plan. Numerous large employers have spent big
bucks to settle class action lawsuits focused on mutual fund fees in
retirement plans, and fees have fallen. Average annual management
fees of 401(k) funds are below 0.5 percent at large companies and
below 1 percent at small companies. If your company's fund choices
are out of line, talk to your human resources department. If your
only choices are substandard funds and high fees, put only enough in
your 401(k) to get the employer matching contributions, and then
invest additional funds in a personal IRA or Roth IRA.
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- Choose inexpensive mutual funds. Investing in low cost index funds
instead of costlier actively managed funds will put you ahead. A
person earning $75,000 a year who starts saving at age 25 would
spend $104,033 in fees over a lifetime if fees were capped at 0.25
percent of assets annually. At 1.3 percent, that same worker would
spend $409,202, according to the Center for American Progress. That
extra $305,169 could support roughly $1,000 a month for life in
extra retirement income.
- Separate advice from your investments. If you want help figuring
out which funds to invest in, pay a fee-only financial adviser, do
not depend on "free" advice from a commissioned broker. You can get
inexpensive advice from big fund companies like Vanguard, Fidelity
Investments, and T Rowe Price, or from so-called "robo advisers"
like Wealthfront or Betterment.
- Be especially careful about rollovers. When you leave a job, you
typically have the right to keep your money invested in your 401(k),
an excellent choice if you work for a company that provides good
funds within the plan. Or you can roll it over into a so-called
"Rollover IRA" at any brokerage or fund company. Choose a low-fee
fund company or discount brokerage that will enable you to choose
your own investments from a large pool of individual stocks and
inexpensive funds, and buy only the advice you need.
(Linda Stern is a Reuters columnist. The opinions expressed are her
own. The Stern Advice column appears irregularly. Linda Stern can be
reached at linda.stern@thomsonreuters.com; She tweets at http://www.twitter.com/lindastern
.; Read more of her work at http://blogs.reuters.com/linda-stern;
Editing by Dan Grebler)
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