If you book a hotel online, you expect to see the prices first. When you go to take a trip by airplane or rent a car, same thing.
Why not the same with retirement investing costs? Is there something special about investing for retirement that requires secrecy, obscurity, a lack of simple disclosure?
Of course not. Common sense alone is enough to grasp why knowing what you pay matters. But for decades, most Americans saving for retirement had no clue, and that has hurt them — a lot.
Clarity and disclosure is important, and that’s why a new U.S. Department of Labor rule requiring it is so important. The rule will be unveiled in its final form in just a few weeks, after years of false starts and months of heel-dragging by stock brokers opposed to change.
Elizabeth O’Brien, a MarketWatch columnist, recently covered the upcoming rule making, which should take effect sometime in 2016. Once the rule is in place, stock brokers won’t be able to hide fees from their clients, take commissions on the side with no disclosure and otherwise make it hard to understand investment cost.
“This is a historic, pro-consumer event,” I told O’Brien, and it is. The reason is 401(k) plans.
Millions upon millions of Americans will be retiring in the coming decades. Many of them have saved up a lot of money in tax-deferred workplace retirement plans, such as 401(k)s, 403(b)s and 457 plans.
As those workers approach their final weeks of work, they’ll have a choice to make: Leave the money behind in that 401(k) or take it out.
Some number of those workers should leave the money in their workplace plans. A small minority of them have great, well-run plans with very low costs and solid management teams taking care of their retirements.
Unfortunately, most 401(k) plans are not low-cost. They often have unusually high fees and limited investment choices. That might change as companies see assets leaving in droves, but it hasn’t changed much over the decades to date. There’s little reason to believe it will change now.
The alternative is to pull your money out and roll it over into an IRA. But that’s jumping from the frying pan into the fire in many cases.
As my partner Scott Puritz, managing director for Rebalance, recently testified to a Senate committee, commission-driven stock brokers and insurance salesmen are absolutely salivating at the prospect of the fat fees they will collect on those new assets.
The ruling doesn’t say they can’t charge the same fees as before. It does, however, require them to plainly disclose those fees and to act in the best interests of their new clients.
Would you buy a car that gets 12 miles to the gallon and costs you $10,000 a year to maintain? Of course not, and you would know all that before you even take a test drive.
The same thing is going to happen to financial advising, and that’s a good thing. If you know a stock broker is going to charge you 2.5% a year, and that the impact on your account will be $2,500 for every $100,000 they manage, year in and year out, well, you might want to do some shopping around.