New rule enables 401(k) advice
November 02, 2011
A revised U.S. Labor Department rule will soon allow you to get investment advice from the company that administers your company's 401(k) retirement savings account plan. Previous regulations had prevented this to prevent conflicts of interest between financial advisers and their clients.
The rule, which goes into effect Dec. 27, will require advisers to follow steps designed to ensure objectivity. Advisers must either use a certified computer model to make recommendations on the best savings accounts decisions for you, or they can only be paid using a level-fee system that reduces the temptation for the advisor to sell you additional products.
The new rule stems from the fact that Americans are relying more on their 401(k) retirement savings accounts and Individual Retirement Accounts (IRAs) than previous generations.
Another good reason for the rule, according to recent data, is that many consumers make questionable decisions when it comes to choosing investments for retirement savings accounts.
A recent study from Aon Hewitt and Financial Engines reported that people who get advice on their savings accounts see a median annual return 3 percent higher than those who go it alone.
That's not an insignificant difference, particularly since current interest rates for savings accounts and CDs fall well below that 3 percent figure. Calculated over the course of a career, a 3 percent return difference could mean thousands more in retirement savings for those who seek professional advice.
The Aon study noted that unschooled investors too often stay in the same risky investments they made when they were in their 30s, even though they should be moving to safer funds with less risk as they approach retirement. Inexperienced investors also too often panic when the market drops, moving out of a fund when prices are low and not returning until prices have started to climb, according to the study.
The new rule is expected to reduce investment losses by up to $18 billion a year, though employers and plan administrators are not required under the new rule to offer advice.