Hallelujah! It’s been a long time coming but finally, someone, someplace looks willing to end one of the worst scams in financial history.
Last Friday the Obama Administration, through the Labor Department, proposed new regulations aimed at protecting workers’ retirement savings from conflicts of interest among unethical financial advisers. The new regs would require retirement investment advisers, financial planners, consultants and money managers to either base their advice on objective computer models certified by independent experts, or refrain from steering workers into funds they are affiliated with or from which they are receiving a fee or commission.
I have written several columns lately revealing these practices which are wide-spread in this community. Most of your money managers are involved in receiving kick backs from mutual funds for investing your life savings in these instruments that have earned you little or nothing over the past decade.
This is how it works in layman’s terms. Your company hires a financial adviser to manage its retirement savings plan for a fee. That advisor will create a menu of mutual fund choices for the plan. Your company agrees and then you, the employee, will be required to select one or more funds on the menu. Then each month or quarter your 401 (k) or equivalent contributions will be funneled into these investments. What you don’t know is that the adviser usually gets a hefty kick back from the mutual funds they have selected for you and many times these funds’ performance is mediocre at best.
A recent statement from two congressman George Miller, D-CA., Chairman of the House Education and Labor Committee, and Rob Andrews, D-NJ., chairman of the pensions subcommittee, summed it up better than I could.
“All too often, the worst-performing products with the highest fees and best commissions for financial service firms have been pushed by Wall Street on our nation’s workers.”
The only negative in this proposal is that it does not go far enough in my opinion. If passed, this regulation would only apply to your company’s tax-deferred retirement plan and still allow money mangers, planners and brokers to continue to use and benefit from this same kick back scheme when managing your individual accounts and IRAs. Remember too that this kickback is in addition to what they are already charging you in fees and commissions. You will never see this additional fee, called 12b-1 in your statement either. It comes right out of the price of your investments.
“But my company doesn’t charge me anything for my 401 (K),” protested a local woman who retired two years ago from a large area employer. “That’s why I haven’t rolled it over into my IRA.”
After analyzing her performance and the implicit fees involved in holding her particular set of investments, I gave her the bad news.
“You are paying an average of slightly over one percent in hidden fees to those mutual funds each year,” I explained, “and in return for that fee, those same funds lost you 35% of your retirement savings over twenty years.”
Needless to say this information was a shock to her. I know many of my readers out there are in the same boat. Hopefully, this proposal will pass, although I can tell you right now, many financial services firm in the country will be spending as much as they can to kill this bill before it sees the light of day. Don’t let them!