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The Dangers of Conflicted Investment Advice

 

Yesterday, the White House issued a report entitled “The Effects of Conflicted Investment Advice on Retirement Savings”. I recommend every retirement plan sponsor read this report. The report concludes that conflicted advice leads to lower returns, which can result in retirement account balances that are 12% lower at retirement age.

 

Current Department of Labor regulations require retirement plan sponsors to address the conflicted advice issue in their vendor and advisor hiring process. However, these responsibilities do not extend to the IRA rollover process. The decision to roll a retirement plan or 401(k) plan balance into an IRA is made by the current or former plan participant, who may be influenced by a broker who is not subject to the fiduciary standards applied to registered investment advisors.  Retirement plan sponsors are coming under more pressure, through regulation and litigation, to improve the performance of their investment line-up, and to lower costs to plan participants. More often today, a retirement plan participant is best served by leaving their account balance in their former plan, or rolling it into the 401(k) plan at their current job. However, since this choice may not create income for the broker, an IRA rollover is recommended. I firmly believe that the higher, fiduciary standards be applied to every advisor working in the retirement plan and IRA space. I would not, however, want retirement plan sponsors to become responsible for the due diligence process for every IRA rollover.

 

Now would be a great time for plan sponsors to provide plan participants with increased information and education about the IRA rollover process. Provide your employees with the tools they need to carefully evaluate their alternatives as they approach or reach retirement age. The majority of plan sponsors are working hard to ensure good retirement outcomes for their long service employees. Help your employees avoid the conflicted advice that may lead to lower income in retirement.

 

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