Choosing the Right Person to Give You Investment Advice: Information for Investors in Retirement Plans and Individual Retirement Accounts

• Investors in retirement plans, such as 401(k) plans and individual retirement accounts (IRAs), have special legal protections under the federal laws specifically applicable to retirement accounts if they receive advice from a fiduciary.

• Such fiduciaries must avoid transactions that involve conflicts of interest unless they qualify for and comply with the conditions of an “exemption” issued by the Department of Labor.

• If your investment advice provider states that they are acting as a fiduciary, you should ask for that representation in writing.

• A written statement helps ensure that the fiduciary nature of the relationship is clear to both you and the investment advice provider at the time of the transaction, and limits the possibility of miscommunication.

• The Improving Investment Advice for Workers & Retirees exemption requires your investment advice provider to comply with conditions designed to protect you as a retirement investor. These conditions require investment advice providers to:

  • Give advice that is prudent,
  • Give advice that is loyal,
  • Avoid misleading statements about conflicts of interest, fees, and investments,
  • Follow policies and procedures designed to ensure that they give advice that is in your best interest,
  • Charge no more than is reasonable for their services, and
  • Give you basic information about their material conflicts of interest.

• If your investment advice provider is a fiduciary but says they are not relying on the new exemption or a previously issued exemption, ask them why.

• For more information on the Department’s Improving Investment Advice for Workers & Retirees exemption, see the FAQs below.

• Fees and expenses can be charged and paid for in different ways.

• You should be sure you understand the overall cost associated with using a particular investment advice provider and the conflicts of interest that may affect the quality of advice that they provide. You can even use this information to shop around for the best combination of cost and service.

• Fees and expenses for your retirement account and investments can have a significant impact on your retirement savings.

For example, let’s say you want to roll over $100,000 from your 401(k) account into an IRA. One firm pays your investment advice provider more for recommending certain investments. If you follow their recommendations, the fees will be 1% more than comparable investments, every year. As a result of these higher fees, instead of earning say, 6% each year, your IRA earns only 5%. That difference might seem small, but it adds up over time. Based on an initial investment of $100,000, an IRA earning 6% would grow to $179,000 in 10 years. But with an extra 1% in fees, you would earn only 5% and your $100,000 would grow to just $163,000. In other words, that extra percentage point in fees would cost you $16,000. And as more time passes, that 1% difference in fees gets magnified. During the next 10 years your IRA would lose out on another $39,000. You would only have $265,000 while someone who earned the full 6% would have $320,000. That’s $55,000 more than you!

• Fees and expenses can be charged and paid for in different ways.

• In addition to any fees or charges that you may pay directly, your investment advice provider might receive compensation from the firms whose products they recommend or from other sources.

• An investment advice provider has a conflict of interest when the provider is paid more to recommend certain products or accounts rather than to recommend what is in your best interest. You might be unaware of these payments, particularly if information is hidden in fine print or not disclosed at all. These fees can create an incentive to make recommendations that generate the highest fees for the investment advice provider, rather than the best investment return for you.

• Understanding who ultimately is paying your investment advice provider for recommending a particular investment can help you understand these conflicts. The investment advice provider or their firm may stand to make more money with some recommendations than others. Your investment advice provider should clearly explain these conflicts of interest to you before you rely on their advice.

• To help protect you from harmful conflicts of interest, the Improving Investment Advice for Workers & Retirees exemption (see additional FAQs below) requires that fiduciary investment advice providers:

  • Give advice that is prudent,
  • Give advice that is loyal,
  • Follow their firm’s policies and procedures,
  • Avoid misleading statements about conflicts of interest, fees, and investments,
  • Charge no more than is reasonable for their services, and
  • Give you basic information about their material conflicts of interest.

• Investment advice providers can limit the investments they offer for a variety of reasons.

• Some offer products that are put together by your investment advice provider’s firm or certain other companies with shared ownership or management (these products are generally known as “proprietary products”).

• Some investment advice providers will monitor your retirement account and recommend changes to your investments if it appears that you should change course. However, monitoring is not required.

• Not all providers offer monitoring. When choosing an investment advice provider, do not assume that they will monitor the investments in your account or tell you when to change your investments. You can ask whether the provider offers this service and how much it will cost. If the investment advice provider will monitor your investments, you should ask them how frequently the monitoring occurs, and what events may result in your investment advice provider reaching out to you.

• Your employer-sponsored plan may be your single largest source of retirement savings.

• If your money or investments stay in an employer-sponsored plan (such as a 401(k) or pension), they get special protections under Title I of ERISA that do not apply to IRAs or non-retirement accounts.

• In addition, your investments, investment management structures, and associated fees are likely to change upon rollover, and these changes could be harmful if you followed bad advice to make the rollover.

• There are many factors to consider when considering rollovers, including differences in expense, available investments, services, and distribution options. So, if your investment advice provider recommends a rollover, ask a lot of questions so that you can be sure you understand the reasons for the recommendation and whether it’s right for you. Important questions include:

  • Will I have to change my investments if I move my retirement savings to an IRA or a different 401(k)?
  • How do the fees and expenses compare to what I pay now?
  • Why do you think a rollover is better than leaving my retirement savings in my current 401(k), pension, or IRA?
  • Would a different mix of investments in my current 401(k) or IRA serve me better than rolling my retirement assets out?
  • Is there a difference in the types of distributions I can take?
  • What are the possible tax consequences of following your advice?

You deserve to receive investment advice that is in your best interest, and fiduciary investment advice providers deserve to be paid a fair and reasonable fee for their advice. Also, you should be able to pay for advice any way you would like to, such as through commissions, an hourly fee, or a percentage fee based on the value of the account. Some types of common compensation for advice, such as commissions, however involve conflicts of interest and therefore are prohibited under federal laws specifically applicable to retirement accounts, unless your advice provider complies with exemption conditions designed to protect your interests.

One exemption recently issued by the Department of Labor, called the Improving Investment Advice for Workers & Retirees exemption, allows your fiduciary investment advice provider to be paid in these different ways under conditions designed to ensure that you receive advice that is in your best interest.

Although other exemptions are available to fiduciary investment advice providers, the Department expects that many providers will choose to rely on it due to its flexible, principles-based approach.

Investment advice providers who may rely on the exemption include investment advisers, broker-dealers, banks, and insurance companies along with their employees, agents, and representatives. An investment advice provider who is relying on the exemption must give you a written statement that they are a fiduciary. Some investment advice providers may use model language provided by the Department.

You can always ask your investment advice provider if they are a fiduciary under the federal laws specifically applicable to retirement accounts and if they are relying upon the Department’s Improving Investment Advice for Workers & Retirees exemption (also known as PTE 2020-02), to ensure you are fully informed about the advice arrangement. Remember to have them put it in writing.

You may receive information from your investment advice provider that is required by another regulator, such as the Securities and Exchange Commission (SEC). Form CRS and its related rules require SEC-registered investment advisers and SEC-registered broker-dealers (together, “firms”) to deliver to retail investors a brief customer or client relationship summary that provides information about the firm.

The investment advice provider giving you advice in your retirement account may be a broker and/or adviser that is registered with the SEC and may therefore be required to give you this document. It is important to note that the protections in the Improving Investment Advice for Workers & Retirees exemption are in addition to the legal requirements and standards imposed by other regulators, such as the SEC, and the exemption’s protections apply only in the context of a fiduciary providing investment advice to you about your retirement accounts.

For questions about SEC requirements, visit SEC.gov or Investor.gov, the SEC’s website for retail investors. Investors can also learn more about broker-dealers, investment advisers, and the SEC’s Form CRS at Investor.gov/CRS.

To comply with the exemption, investment advice providers must put your financial interests before their own competing financial interests. When providers operate under the exemption’s best interest standard, they must investigate and evaluate investments, make recommendations, and exercise sound judgment as a knowledgeable and impartial professional. Their investment recommendations must be based on your interests, not theirs. This means that, for example, in choosing between two investments, it is not permissible for the investment advice provider to recommend investing in the one that is worse for you but better for their bottom line.

No. The exemption’s best interest standard focuses on the investment advice provider’s behavior at the time they make a recommendation to you, rather than how the investment ultimately performs over time. Therefore, your investment advice provider is not necessarily responsible if your investment loses money. Even the best investments typically involve some risk of loss and are likely to go up and down in value over time.

No. The best interest standard requires your investment advice provider to:

• Investigate and evaluate investments, make recommendations, and exercise sound judgment as a knowledgeable and impartial professional (act prudently), and

• Base their recommendations on your interests at the time of the transaction rather than their own competing interests (act loyally).

It does not require them to identify the absolute best investments for you out of all possible investment options.

Under the exemption, a rollover occurs when you transfer the funds in one retirement plan or account to another retirement plan or account or from a commission-based account to a fee-based account.

If your investment advice provider is a fiduciary relying on the exemption when they recommend a rollover, the best interest standard and other protections of the exemption will apply. The exemption requires your provider to give you a written document setting out the reasons they believe the rollover is in your best interest. This includes considering your alternatives to a rollover, such as leaving the money in your 401(k) and taking advantage of other investment options available in that 401(k). The investment advice provider is expected to make diligent and prudent efforts to obtain information about your existing 401(k).

Therefore, before recommending the rollover, your investment advice provider should ask you for information on the investment options, fees, and expenses charged by your 401(k) in order to compare it to the investment options, fees, and expenses that will be charged for your new IRA. Without such information, your advice provider will not have all the information needed to give you the best possible advice. Many 401(k) plan administrators (often your employer) are required to provide plan, investment, and fee information to you. This information may be sent to you by mail or you may have access through a website. If you do not provide this information to your investment advice provider, the provider may need to rely on more general information that may not accurately and precisely represent the fees and expenses of your specific 401(k) account.

Yes. You can call the Employee Benefits Security Administration’s Office of Exemption Determinations at (202) 693-8540 (this is not a toll-free number).