Today's young professionals will face a vastly different retirement landscape than their grandparents did. Not so long ago, working Americans tended to stay at one place for most of their career. They'd retire after a few decades and get a pen, a party and a pension. They knew they could count on monthly checks to get them through their retirement years.
But today, most workers have to take responsibility for their own retirement savings. And unless you have a degree in finance, there's a good chance you'll need some advice to help navigate the complicated world of IRAs and 401(k)s.
When we seek medical advice, we expect our doctors to recommend treatments that are best for our health. When we seek legal advice, we expect our attorneys to work solely in our interest. We should expect nothing less when we seek financial advice.
Many advisers do act in their customers' best interest. But not everyone is legally obligated to do so, and some advice is tainted by conflicts of interest and hidden fees that can reduce an individual's nest egg by more than one-fourth over a lifetime of saving.
Merlin and Elaine Toffel saw this firsthand. The Toffels had done everything right. Merlin was a Navy veteran and an electrician. He and Elaine raised their four kids in Lindenhurst, Illinois. Over four decades, they built up an impressive portfolio.
But when Merlin was diagnosed with Alzheimer's and could no longer manage their finances, Elaine turned to the bank they trusted for years. The bank's investment broker told her to liquidate their portfolio, selling them $650,000 in variable annuities. Elaine trusted that advice; she thought it was in her best interest.
But she didn't realize that those variable annuities charged nearly 4 percent of the investment per year -- more than $26,000 annually. If the Toffels needed to access the money right away, a 7 percent surrender charge would cost them more than $45,000. In the end, the broker's conflicted advice cost a hard-working, middle-class family more than $50,000.
This week, the Department of Labor (DOL) took an important step to protect families like the Toffels.
DOL's final "conflict of interest" rule is rooted in the simple principle that those who are paid for retirement investment advice must act in the best interest of their clients. If that sounds like common sense, that's because it is. In crafting the rule, we drew from the best minds in the financial services industry, consumer groups, retirement advocates, and government, and made significant changes to the proposal based on their feedback. These changes include enabling firms to incorporate the disclosures and commitments required by the rule into their existing documents; streamlining the disclosure and data retention requirements to reduce burdens while giving consumers the information they need; clarifying what constitutes non-fiduciary investment education and marketing; and giving firms significantly more time to implement the changes. This rule gives retirement advisers and brokers the flexibility needed to conduct business in a dynamic marketplace and retain compensation practices that work for them and their customers, while dramatically reducing conflicts of interest that cost retirement savers billions each year.
The final rule is the product of more than six years of research, public input, interagency debate and discussion. It reflects over 5 months of public comment, 4 days of hearings, over 3,000 substantive public comments, and over 100 meetings with industry, Congress, federal and state regulators, and others.
DOL was committed to getting this right, so when concerns were raised about an earlier proposal in 2011, we scrapped it and went back to the drawing board. And now that the rule is final, we are committed to working with all stakeholders to understand and implement the new rule effectively.
But make no mistake: despite our willingness to incorporate feedback to improve the rule, some special interests and their allies in Congress made clear that the only rule they wanted was no rule at all. They tried to stop it before it was finalized. This final rule would not have happened without the President's leadership and the leadership of Democrats in Congress who stood up for the rule.
The financial services market may be complicated, but what working families expect and deserve is not: after a lifetime of hard work, a secure retirement should be within their reach. When people like the Toffels seek advice about how to invest their savings, they deserve the best advice they can get. This rule will go a long way toward helping more people enjoy the secure retirement that is a pillar of the American dream.