Over the past few months, we've heard a lot about how brokerages are restructuring their businesses to align with the Department of Labor's new fiduciary standard for advisors to retirement accounts. Firms are ramping up fee-based platforms, compliance departments are drafting new workflows and disclosure statements, and lawyers are doing a lot more of whatever it is lawyers do.
But one crucial aspect isn't getting as much press: Will the new rule really add to Americans' retirement savings? That was the crux of the argument from President Obama and the DOL. Retirement savers were being cheated out of $17 billion a year, they said, or the equivalent of one percentage point a year subtracted from their returns, thanks to non-fiduciary-level advice.
This new rule, presumably, will stop that outflow and should, by this logic, deliver a percentage-point boost to retirement account returns going forward, right? Does anyone really expect that to happen? Like most, I'm in favor of putting clients' interests first, and I think the DOL successfully threaded a narrow needle when it made numerous concessions to the industry while still leaving in place mechanisms that should weed out the garbage sometimes peddled to retirement savers.
The rule will change who gets paid what inside the financial services firms, but I have yet to see a realistic demonstration that shows Americans will get a significant bump in retirement savings going forward.
As it is, most Americans, advised or not, barely have any retirement savings to protect. This has less to do with commissions and conflicted business models than it does with wage stagnation; low job growth; explosive costs in higher education, housing and health care; near zero-percent interest rates on savings; and lack of access to adequate workplace retirement plans with automatic enrollment and escalated contributions, especially at smaller businesses.
Earlier this year, economist Monique Morrissey from the Economic Policy Institute released a report based off of the Federal Reserve Survey of Consumer Finances and found a depressing lack of retirement preparedness for most Americans. Over half have no retirement savings at all. For those that do, the average level of savings, in 401(k) and IRA plans combined, has gone up by all of $4,000 since 2001. Most stunningly, for those workers age 56 to 61, the median savings is $17,000.
Even the top 10 percent have median retirement savings of only $240,000. That gives them all of an additional $10,000 a year, with the standard 4 percent annual withdrawal (assuming no principal appreciation), to add on to their Social Security check.
If politicians really want to help Americans "retire with dignity," as they claimed when advocating for the fiduciary rule, there are bigger fish to fry. Raise the limits on tax-deductible contributions to retirement accounts, for instance. The fiduciary rule is a good thing, but it won't go nearly far enough to ensure a "successful" retirement for most Americans.