A lot of money is invested in individual retirement accounts in this country, some $7 trillion – with a T – according to The Wall Street Journal, and sometimes the decisions which are made in managing those funds are not as low cost as they could be. Stockbrokers have had only to meet a “what’s suitable for the account holder,” standard for tax-free retirement accounts. Next year, “suitable” will disappear, and in its place will be “in the best interest.”
The difference is that some brokers in meeting the present standard have been putting their clients into investments which earn brokers higher fees than something similar which is equally good or better but pays lesser fees. That will end with “in the best interest.”
Brokers have also been able to charge a significant fee to roll a company-sponsored 401(k) into an IRA, a popular and perfectly legal tax-reducing step. Ten percent has been reported. These new requirements, mandated by the Department of Labor, will include cutting back that rollover fee to something less exorbitant.
While not all 401(k) funds will make that rollover move, there is a lot of money in 401(k) accounts. Some $6.7 trillion – with a T – according to a trade group.
The new rules by the Labor Department have been massaged for a few years and are expected by the Labor Department to save IRA investors some $4 billion in fees. Again, the percent fees many be small, but a lot of money is involved.
Will money-management firms and their advisers and brokers accept lower revenues from lower fees? No, and that is the rub, reducing to some degree the advantages to account holders of the new rules. It is expected that the smallest accounts will be turned away as unprofitable, while many larger accounts will be charged a fixed fee for management, such as 1 percent. Brokers may also be inclined to recommend more conservative investments, those with less likelihood of a large gain.
But if an investor is comfortable with his broker earning higher fees for the investments he recommends, believing that is of value, the investor can waive the Labor Department’s new “in the best interest” protections. That is as it should be.
Americans generally do a poor job of managing their 401(k) and IRA accounts, often not seriously reviewing and making changes to the former for years. And brokers, skilled at what they do day in and day out, drive the decision making often unchallenged.
These new upcoming Labor Department rules will leave additional money in many IRA accounts to grow for the account holder. When so little is set aside for retirement, every small amount will help.
