Obamas New Rules To Protect Your 401K

Published: May 18, 2016, 7:18 p.m.

b"For some time now, consumer advocates have been urging legislators to do more to protect consumers against excessive fees charged by a few rogue financial planners for biased financial planning advice that is often \\u201cnot in the best interests of their clients\\u201d\\u2014just so these advisors can rake in higher fees and commissions\\u2014in a manner that essentially steals from their clients\\u2019 retirement contributions and fills their own pockets. Not good!
After much deliberation with the financial services industry, the Obama Administration enacted new rules on April 6, 2016, to protect more Americans from being ripped off. These rules are controversial, but I think there\\u2019s some merit to them because when you\\u2019re planning for retirement, your advisor should be focused first on what makes sense for your finances, not theirs.
The new rules are designed to prevent consumers from being steered toward IRAs and other retirement investments with \\u201chigher fees or lower returns\\u201d that disproportionately benefit the advisors who are recommending or selling them and are against the consumer\\u2019s best financial interest. In justifying this new legislation, the White House estimates that such conflicts of interest cost Americans $17 billion a year in lost retirement savings. The White House also estimated that the rules would save a 45-year-old worker with $100,000 in retirement savings about $37,000 over two decades before turning 65. That\\u2019s a fair amount of money for one household.
But, on the downside, these rules are fairly complex and complying with them could drive up the cost of investments, making it a bit more difficult for average Americans to get retirement advice. \\xa0So let\\u2019s see how this all plays out over the next few decades.
In the meantime, here are the top five things you need to know about the new rules, which will be phased in over an 8-month period beginning in April 2017:
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* Your nest egg takes precedent.

For decades, many investment advisors have been required\\u2014 under federal law\\u2014to put the best interest of their clients first. Such advisors usually earn a flat fee and are known as fiduciaries. But other retirement advisors, such as brokers and insurance agents, have been held to a lower standard and were only required to make sure investments were suitable for their clients, which is a much broader standard and quite open to interpretation. This gave brokers and agents the leeway to recommend investments that provided nice commissions and sometimes benefited the agent\\u2019s bottom line even more than the client\\u2019s.
These commissions are paid by companies that offer mutual funds or other investments that can have higher fees or lower returns, benefiting the company and harming the client. And this has become a bigger issue as Americans have shifted from pension plans administered by their employer to 401K and other retirement plans that they manage themselves.
So the new rules make all retirement investment advisors into fiduciaries, meaning they must put the client's best interests above their own.
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* The biggest impact will be on IRAs.

While a 401(k) plan is administered by a fiduciary who selects and monitors the investment options available to participants in the plan, such is not the case with IRAs, which can be sold by a host of financial advisors.
The conflict-of-interest is greater with IRAs. IRAs are purchased individually and have higher costs while 401K plans are run by companies that pool the investments of their employees and get better rates. So when you\\u2019re with all the other employees in a company-administered 401K, you have more buying power. To mitigate this conflict of interest, the new rules require that advisors who sell or help manage IRAs act as fiduciaries.
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* Financial advisors can still accept commissions\\u2026 with a caveat."