Opinion: Here’s what people about to retire really need their 401(k) plan to provide

The U.S. Department of Labor believes that the best way to address employees’ retirement planning needs is to propose a new set of rules designed to rein-in unethical rollover-related product recommendations.

No one doubts the DOL’s good intentions. After all, a rollover is one of the biggest financial decisions most people will ever make. Retire and keep the money in the 401(k)? Roll the money over to an IRA? What’s the right allocation for stocks and bonds? What are the downsides and costs to annuities that promise income forever? What about taxes in retirement?

These are not trivial questions. The DOL has always required retirement plan sponsors to provide educational resources to broadly explain the pros and cons of these various options.

But in terms of personalized rollover advice, employers tend to lean on the plan’s recordkeepers and service providers. Most of which are owned by commission-driven broker-dealers, asset managers, banks and insurance companies armed with teams of salespeople whom employees believe are “retirement planning experts.” 

Their overriding mandate? Keep retirement assets in-house.

You don’t need to be a Wall Street compliance guru to see the glaring conflicts of interest here. Would any broker recommend that a retiree move their 401(k) money into an IRA with a different (competing) custodian? What kind of insurance agent wouldn’t advise a participant to put some or all of their nest egg into annuities?

The DOL wants to nip these questionable practices in the bud by requiring any financial professional or organization that gives rollover-related advice to adhere to the fiduciary standard. In other words, those making product recommendations must clearly demonstrate that their recommendations align with each participant’s best interests. 

If this all sounds familiar, it is. Remember Reg BI? It was the SEC’s attempt to require brokers to act as fiduciaries when providing investment advice.

But rigorous opposition from broker-dealers watered down the rules so much that in many cases all a broker needs to do to fulfill the letter of the law is to document their unavoidable conflicts of interest (often buried in hundred-page disclosures).

Considering the complex networks of recordkeepers, asset managers, insurance agents, advisors, third-party administrators and payroll companies that work together to design and service retirement plans, it will be a Sisyphean challenge for the DOL’s new rules to cover all of these rollover-related fiduciary bases.

And when breaches of the rules inevitably occur, angry participants will take employers to court. Most importantly, consider the typical employee who’s about to retire. The DOL’s proposals don’t even come close to addressing the most crucial financial questions that keep most soon-to-be-retirees up at night.

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Here’s what people about to retire tell me: They’re worried about their future cash flows; when to start taking Social Security, and how to keep track of required minimum distributions and minimize their taxable impact.

They want to know if and when they should convert to a Roth IRA, and how to pass these assets on to their heirs or donate them to charities. They need professional advice for the rest of their lives that also encompasses the needs of their partners or spouses. And many believe that the rollover recommendations coming from the plan’s service providers are objective and unencumbered by self-interests. 

The simple solution is to give employees access to advice from from highly-qualified, independent registered investment advisers who are already held to the fiduciary standard, not because they’re forced to comply, but because they’ve elected to take on this fiduciary responsibility.

Unfortunately, most of these plans’ in-house rollover consultants and brand name brokerage service providers can’t provide this kind of help because they’re not highly qualified fiduciary advisers. But rather than try to force a plan’s financial salespeople to act like fiduciaries, the DOL should instead provide resources and incentives that encourage employers to offer retirees access to vetted independent, state or SEC registered fee-only fiduciary investment advisers and financial planners. 

To help retirees find these advisers, employers could provide links to reputable organizations and vetted partners that connect individuals with these fiduciary advisors.

Providing access to these fee-only advisers won’t prevent employees from working with their plan’s existing rollover consultants if they want to. Instead, it will simply provide a different advice option that they might not be aware of.

It’s critical that we take a step back and ask what is the actual problem we’re trying to solve? If providing better retirement advice is truly the goal, adding fiduciary advice to the rollover menu is a far better option and, at the same time, will help employers reduce their exposure to lawsuits.

Companies that embrace this initiative can meet their rollover-related fiduciary obligations far more effectively than having to jump through yet another confusing set of DOL regulatory hoops. After all, making it easier to help employees plan for their retirement is in everybody’s best interests. 

Pam Krueger is the founder and CEO of Wealthramp, a fee-only financial adviser matching service. She is also the creator and co-host of the award-winning MoneyTrack investor-education TV series, seen nationally on PBS, and the Friends Talk Money podcast.

Also read: I’m 73 and just took my first RMD. Can I roll over my IRA into my 401(k)?

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