In June 2017, financial advisors who recommend retirement plan investments will be required by the Department of Labor to act as a FIDUCIARY by putting your financial best interests ahead of theirs.
You may ask, “Don’t they always do that?” Not necessarily.
One mark of a FIDUCIARY relationship is the fact that your advisor is paid a mutually agreed upon fee for services rather than by commissions on investment and insurance products. This flat-fee payment model negates one conflict of interest: if an advisor gets paid to sell certain products, those products are more likely to end up in your portfolio. Free of commission incentive, advisors will offer a wider array of products to meet your goals.
If your 401(k) or 403(b) retirement plan is funded by an annuity, the plan was probably offered to your company by an insurance company or securities firm salesperson. The combined costs, fees, and commissions involved in the sale will retard growth of your account values for years and years. You may have noticed that the mutual funds you have chosen in your plan account are cloned from identical funds available outside the plan, except your annuity fund values are lower than values reported daily for the original, non-annuity funds. That is because you are paying the insurance company its fees and costs for issuing and servicing your annuity, and a hefty commission to the salesperson who sold the plan to your company, and a fee to an affiliated investment management firm for organizing the menu of investments available to plan participants. There is a better way to fund your retirement plan.
Let’s say you contribute $1000 a year for 30 years to a retirement plan annuity for which 5% of values go to pay fees and costs, while at the same time the underlying original, non-annuity funds actually average 6% a year. In 30 years when the insurance company sets your life-time income based on the value of your account on retirement day, your account will be $44,273 smaller than it could have been. That’s significant.
The advisor who sold your company the annuity-funded retirement plan was not acting in your best interest. The US Department of Labor’s ruling requires full disclosure of fees and costs built into retirement plan products, and those advisors who are paid for advice by commissions on products they recommend must announce in writing that they do business with your best interests at heart, as your FIDUCIARY. And they must be able to prove it. Don’t forget… June 2017. It’s a giant step long overdue.