Greetings, readers. The air has become crisper and the temperature milder here in the Big Apple. With the summer officially behind us, I expect the fourth quarter to be very exciting, both personally and professionally.
But tonight, let’s keep it professional. On Monday morning (9/28), you can catch me on Good Morning America in the first hour (7:00-8:00am EST). ABC correspondent Linzie Janis and I went to Baskin Ridge, New Jersey, to speak with the Hughes family about how they could potentially save more for retirement by understanding and then reducing their investment expenses in their retirement plans / 401(k)s. We also discussed some of the benefits that can come from consolidating multiple retirement plans into one. This is all great information for Americans to possess, since it could have a positive impact on their retirement savings.
However, what many Americans might not know is what’s going on in the background that makes a story like this come to the forefront of mainstream media (don’t get me wrong – saving extra money is a good thing). While it’s also just a popular topic to cover, there seems to be a timely connection to this report and the way that the retirement landscape is changing with regard to retirement plans, the fees charged and how the financial services industry approaches consumers regarding them. I am referring to the proposed DOL retirement rules, which in a nutshell, would beef up the industry’s obligations to consumers by moving away from a weaker “suitability standard” to the more rigorous “fiduciary standard.”
“fiduciary standard” = the obligation to put the client’s interests above all else
Since there really is no higher standard than this, we can conclude that the suitability standard is less stringent without even having to define it. But what you need to know about the suitability standard is that it allows for certain investment products, which are often more expensive, to end up in the accounts of consumers. This can be bad when there might be similar or even better investment products available for less. Now, one of the best delivery systems for getting these products into your hands is through a employer-sponsored retirement plan, like your 401(k). Having installed 401(k) plans myself, let me tell you, unraveling the fee structure for most plans can be a challenge, because the fees and expenses that the employee pays don’t always stop with the particular investments you’ve selected, which the GMA segment does a good job addressing. This means that in addition to those investment fees, there are often fees and expenses related to the administration of the plan itself, which may or may not be picked up by you. It all depends on the plan.
Let’s stop here, because my commentary can really expand even further to the broader issues within the financial services industry. What I believe is the biggest sticking point out of all of this is how some 401(k) plans and their related investment options are engineered to charge more because you probably know less. And here’s the kicker: I can almost promise you that you DID, at some point, receive the proper legal disclosures relating to the fees and expenses of your retirement plan, but what you more than likely did not receive was an easy explanation of how they worked.
As a fiduciary, I enjoy knowing that I am working in my clients’ best interests, so I hope the DOL’s retirement rules take hold, because I really have nothing to lose. That’s clearly not the same for many others in my industry who might stand to lose a lot of money should the fiduciary standard be the prevalent standard. This might explain why there are some who are fighting very hard to not implement something that is better for you. Look, if you’re going to be charged something, you should know what you’re being charged and understand it.
Watch. Here’s how we do it in the context of retirement:
- Each year, it is estimated that you are charged a total of X% of your plan balance.
- The investments you’ve selected charge an average of X% annually. These fees are included in the returns of your respective investments.AND
- The plan you are enrolled in charges an average of X% annually. These fees are deducted from your account at the beginning of each calendar quarter and will appear on your statements.
It would be great if this appeared at the top of account statements. It’s really not a difficult thing for providers to do, and I think most people would understand what it means. Then, we would be better equipped to make informed financial decisions when it comes to how we want to invest for our retirement.
And how could that be a bad thing?