Big Win for Retirement Savers?

DOL rule to save investors $87B – if it survives lawsuits

Ric Edelman: It's Thursday, June 6th. On today's show, a new rule that'll save investors $87 billion over the next 10 years. Well, here we go again. The Department of Labor has issued a new rule requiring that everybody who deals with retirement plans operates as a fiduciary.  

We've been trying to get this rule in place ever since Barack Obama was president. There have been lots of attempts, and every time the Department of Labor acts, they end up in court, and they end up losing. Here's the deal. There are lots of different people who engage in the world of retirement plans. Stockbrokers, insurance agents, registered investment advisors, called RIAs. And they all operate under a different set of state or federal rules. 

Stockbrokers have to act under a rule that basically is a “know your customer” rule. Insurance agents have to operate under a state rule of utmost good faith. But RIAs have to operate under a rule called “the fiduciary standard”, meaning serving your best interests. This fiduciary standard only applies to registered investment advisors. It does not apply to stockbrokers or to insurance agents. And yet all three of these groups have engagement or the potential to engage with 401k plans and other retirement plans offered by the workplace. These retirement plans are governed by the Department of Labor.  

And there's a major law that overrules all, there's a major law that rules over all of this called ERISA. ERISA says that you've got to act as a fiduciary, but it hasn't applied to the people involved in this. Well, now the Department of Labor, I should say, now and once again, the Department of Labor is trying to have the fiduciary standard apply to everybody who engages with these retirement plans. If you had to sell only those investment products that were in the client's best interest, you wouldn't be able to sell products that have the highest commissions, like annuities that charge 10% a year. Insurance agents love to sell those. Or mutual funds that cost 2% a year. Stockbrokers love to sell those. Especially, you know, these kinds of investments are incredibly expensive, compared to ETFs and index funds that are 95% cheaper. Morningstar says that if this new fiduciary rule gets enacted, investors will save $87 billion in fees over the next 10 years because the high expensive products that have been traditionally sold to 401k plans and other retirement accounts won't be available in the marketplace anymore. 

But, of course, this new rule has to take effect, and first it has to survive lawsuits. Well, who would sue to prevent Wall Street from serving everybody's best interests? Wall Street, of course. A trade group called the Federation of Americans for Consumer Choice has sued the Department of Labor. And who is the Federation of Americans for Consumer Choice? It's a bunch of companies that sell annuities, the very products that would be prohibited if this new rule took effect. It's gonna take the court a while to sort this thing out. DOL's new rule is 476 pages long. It really takes that much to say, just do the right thing? I guess so.  

And here's the most ironic part of this entire conversation. If the rule goes through, financial advisors actually stand to gain a trillion dollars in new asset flows. That's about how much money flows out of 401k plans every year and into IRAs. That's because of all the people who reach retirement each year. They leave their job, and when they do, they move the money that's inside their 401k to their own IRA. You see, when you leave your job, you've got three choices. You can leave the money where it is in the 401k, you can withdraw it as a single lump sum payment, or you can roll it over to an IRA. 

Well, taking it all as a lump sum payment, that's always the worst choice. You'll pay taxes and you'll probably squander the money. You'll have nothing for security. So the real choice is whether to leave it where it is in the company 401k, or to roll it over to an IRA. From my experience, from being named the number one financial advisor in the country three times, I've been doing this for 30 some years, in most cases, in my experience, not all, but most of the time, the best choice for the client was to do a rollover to an IRA. 

Most company plans have limited investment options. Sometimes they have restrictions on how much you can withdraw each year and when. With an IRA, though, you've got maximum flexibility. Invest the money however you wish, withdraw it whenever you wish, and this flexibility extends not only while you're alive, but also has a lot of options for you regarding your estate planning. 

You know, that raises an even bigger question. With all the efforts by the Department of Labor to govern 401k plans, and with all the money in them, was the creation of these 401ks actually a mistake? 401k plans were invented 45 years ago based on an arcane section of the tax code section, you guessed it, 401k, duh. This notion of retirement accounts based on 401ks was invented by a retirement benefits consultant guy by the name of Ted Benna. And he thought this might be a cool way for workers to save for retirement as a supplement to their pension plans. Workers were already putting part of their paychecks into their pension plans, but maybe some of them could put additional dollars here as well. 

But that's not how it turned out. Instead of companies creating 401ks to sit side by side with their pension plans, companies started using the 401ks to kill the pension plans. Turns out it's a lot cheaper for a company to operate a 401k than a pension. And a 401k has no promises. You get back only what you put in, plus any profits. 

But with a pension plan, the company is legally guaranteeing that you will get a certain monthly income for life. That's a huge liability for the company. So you fast forward from when Benna created these things decades ago to today, whereas in the past almost every big company had a pension, today only 17% of them do. 

By contrast, there are now 700,000 401k plans across the country with $7 trillion in assets. The problem is that most of the money in those plans is held by employees who earn the most money because they're the ones who can afford to put money into the plan in the first place. I mean, think about it. If you're not earning a whole lot of money, you've got to use all of your paycheck for your daily expenses. Housing, food, clothing, insurance. But if you're earning a whole lot more, then you've got money left over every month, and you can toss some of it into the 401k if you wish. This year, you can contribute up to $23,000 into your 401k. But you tell me, how many people can really afford to do that? Not somebody making $80,000 a year, let alone $30,000 a year. 

Somebody making $200,000 can, and that's my point. 401ks are really best for high income workers. Low income workers can't afford to participate to the same degree. And all this assumes that your boss even offers a plan to begin with. But a third of US workers work for an employer that doesn't even offer a plan. Not only are these folks not making much money, they couldn't save in a pretax, tax deferred plan even if they wanted to because their employer doesn't offer one. The numbers say it all. The top 10% of households have 401k assets averaging $500,000. The households in the 8th decile, not the bottom 10%, and not the next to bottom 10%, but the 10% above that, the 8th decile. Their average 401k balance isn't 500 grand, it's just 20 grand.  

But is the 401k so awful? No, not at all. Sure, I'd prefer that pensions still existed in private companies like they do for civil servants in the military, but that's an amazing aspect of 401k plans that most people fail to realize that makes them fabulously better than pension plans. When you get a pension, you get income for life, maybe income for your life and your spouse's life, but when you die, that monthly income stops, or after your spouse's death, the monthly income stops. In other words, there's nothing for your children. But with a 401k, when you die, all that money goes to your spouse, or to your kids, whoever you want your heirs to be. So a 401k might not be as good for you as a pension, but it's a hell of a good benefit for your kids. Maybe that's the best reason to max out your 401k contributions. 

----- 

Ric Edelman: Hey financial advisors, are you fluent in crypto, blockchain, bitcoin, Ethereum, stablecoins, tokenization – and most importantly, crypto taxation, estate planning, and asset allocation? Take the online course, become Certified in Blockchain and Digital Assets. Thousands of financial professionals in 37 countries have enrolled. Become fluent in crypto so you can help your clients and build your practice. Enroll today and get your CBDA designation. 

----- 

Ric Edelman: On tomorrow’s show, free money for children, plus a conversation with the honorable Chris Giancarlo, former Chair of the CFTC on the Digital Dollar Project. 

----- 

Subscribe to podcast updates: https://form.jotform.com/223614751580152 

Ask Ric: https://www.thetayf.com/pages/ask-ric 

----- 

Links from today’s show: 

Become Certified in Blockchain and Digital Assets: https://dacfp.com/certification/  

----- 

Follow Ric on social media: 

Facebook: https://www.facebook.com/RicEdelman 

Instagram: https://www.instagram.com/ric_edelman/ 

LinkedIn: https://www.linkedin.com/in/ricedelman/ 

X: https://twitter.com/ricedelman 

YouTube: https://www.youtube.com/@RicEdelman 

----- 

Brought to you by: 

Invesco QQQ: https://www.invesco.com/qqq-etf/en/home.html 

Schwab: https://www.schwab.com/ 

Disclosure page: https://www.thetayf.com/pages/sponsorship-disclosure-fee 

-----