A new Department of Labor rule governing the advice investment professionals can give their clients has been applauded by a federal employee association.
National Active and Retired Federal Employees Association president Richard Thissen praised the department’s final rule that requires investment advisers to have a fiduciary responsibility when it comes to the retirement plans they suggest to clients.
“Release of this rule is a major accomplishment that will help to safeguard the retirement savings of all Americans, including federal employees and retirees who are currently receiving poor advice regarding their Thrift Savings Plan holdings,” Thissen said, in a statement.
“When you turn to an adviser for guidance on how to invest your hard-earned retirement savings, you should expect to receive advice that is in your best interest, not theirs.”
DOL released the final rule on April 6 following a six-year process of proposals and feedback from industry stakeholders.
The rule is meant to ensure that financial professionals are advising clients to invest in plans that will benefit them and not the adviser.
The rule change amends the Employee Retirement Income Security Act, a 1974 law that sets the standards for pension and retirement plans, by shifting advisors from a suitability standard to a fiduciary standard in providing investment advice to clients.
The suitability standard requires advisors to be reasonably certain that their recommendations are suitable for their clients.
By requiring that financial advisers meet a fiduciary standard, the rule ensures that advisers have to act in the best interests of their clients and are prohibited from making recommendations that strictly net them higher commissions.
The White House said, in a release, that the rule protects investors who are more frequently choosing 401Ks and IRAs as investment plans.
“While many investment advisers acted in their customers’ best interest, not everyone was legally obligated to do so,” the release said.
“Instead, the broken regulatory system had allowed misaligned incentives to steer customers into investments that have higher fees or lower returns—costing some middle-class families tens of thousands of dollars of their retirement savings.”
The White House Council of Economic Advisers said that on average, IRA investors lost $17 billion a year due to conflict of interest advice, which was legal for some investment plans, especially rollovers.
Thissen said that the lack of ERISA coverage for rollovers had left federal employees investing in the Thrift Savings Plan at particular risk and urged Congress to allow implementation of the rule.
““NARFE has been particularly concerned that federal employees and retirees invested in low-fee Thrift Savings Plan funds – the federal employee version of a 401(k) – have not been adequately protected from unsound financial advice regarding their TSP holdings,” he said.
The new rule is expected to go into effect on April 10, 2017.