American workers who rollover 401(k) retirement savings into individual retirement accounts lose at least $8 billion per year because of conflicts of interest created by financial advisors’ reliance on commissions, according to a new Department of Labor (DOL) report.
The problem: Employees who change jobs, often turn to financial advisors to make recommendations on how to invest 401(k) balances and handle the complex task of transferring them into IRAs. Those advisors are often compensated through fees and commissions paid by the investment funds they recommend.
The White House has directed the DOL to draft new rules requiring investment advisors to follow a “fiduciary standard” that would put clients’ interests first and disclose any conflicts of interest. The DOL is on point on the issue because it enforces the Employee Retirement Income Security Act.
Total losses from conflicts of interest could cost more than $17 billion per year, according to the report, titled “The Effects of Conflicted Investment Advice on Retirement Savings.”
Rollovers from defined-contribution retirement funds into IRAs topped $300 billion in 2012. “The overwhelming majority of money flowing into IRAs comes from rollovers from an employer-based retirement plan, not direct IRA contributions,” the report states.