Americans work hard. They do this to make ends meet and save for future goals, like a dignified retirement. Given how hard Americans work to save, public policy must support savers rather than discourage them. This is why many have taken interest in a rule proposed by the Department of Labor (DOL) that would significantly reduce the options that Americans have to save for retirement.
This “conflict of interest” rule has a worthy objective – to help ensure that financial professionals and financial institutions work in the best interest of their customers – that is supported by and across the financial services industry. But despite its good intentions, contained within its nearly 500 pages are serious flaws that will harm those whom it seeks to help: retirement savers.
The proposed rule raises significant concerns about the future availability of financial investment advice and education to low and middle-income retirement savers. Studies have shown that savers planning for retirement with the help of financial professionals save more, make more prudent financial decisions, and resist the urge to make emotional investment decisions, such as selling low following a market dip.
The proposed rule would drive savers toward fee-based arrangements, which typically are only available to wealthier investors due to high account minimums. Those left out – including younger and modest means savers – would have limited options that would generally offer low-service, do-it-yourself type accounts with little-to-no meaningful or personalized advice. These savers would essentially be deprived of access to retirement planning education and advice from financial professionals. As a result, many will simply fail to save for retirement – meaning that the rule is actually likely to increase the retirement savings gap in our country, rather than reduce it.
And even savers who can afford a fee-based arrangement will find it harder to receive advice and education, as they will be forced to sign a contract just to speak to their financial professional about their account. Imagine John Smith began planning for his retirement at age 45 by working with his financial professional. Now John is 65 and ready to retire and make key financial decisions. But due to the complex burdens of the proposed rule, his financial professional is unable to sign the required contract. At this critical moment, John’s retirement plan could unravel.
The proposed rule also disrupts a market that currently offers savers many different options to plan and save for their retirement, tailored to their individual needs and goals. The proposed rule would instead favor some retirement income products over others without considering whether those products help particular savers meet their individual goals. The result: an era of one-size-fits-all retirement planning for all savers.
Lastly, the proposed rule threatens small businesses and their employees by preventing these businesses from receiving the necessary advice to establish workplace retirement plans like 401(k) plans. The result: millions of Americans will lose access to such plans, as more than a third of private-sector workers are employed by small businesses. Even those who do retain access to such a plan will be harmed, as financial professionals will be unlikely to provide even basic explanations of a plan’s investment options due to the consequences of providing such assistance under the proposed rule.
Despite these serious issues, we are concerned that the DOL continues to work at an accelerated pace on this rule making effort and may not have time to consider valuable input before a final rule is in place and effective, expected to be sometime during 2016. The stakes for retirement savers are too high – they simply cannot afford to have Congress wait. We therefore urge lawmakers to engage in the rule making process to ensure that retirement savers are protected and that they continue to have access to a broad choice of financial investment advice, products and education. Americans work hard to save. They deserve our support.
Nick Lane is Head of U.S. Life and Retirement for AXA and Chairman of the Insured Retirement Institute.
Cathy Weatherford is President and Chief Executive Officer of the Insured Retirement Institute.