“If the stock market crashes again, I could lose everything!”
That’s what a 68-year-old relative of mine recently said after she and her work colleaguesabout rolling their money out of their 401(k) plan and into a guaranteed annuity in an IRA. Luckily, she called me first to see if it was a good idea.
My reaction was swift: Your concern about losing everything is wrong, wrong, wrong! And it made me realize — once again — how important theproposed by the Obama administration’s Department of Labor (DOL) is and how damaging its delay and potential watering down under the Trump administration could be.
But first, why she was wrong to be so worried.
Her 401(k) savings were invested in Vanguard’s Target Date funds, which invest more than half of the assets they have in bonds, not stocks. If the stock market crashed, it would most likely affect less than half of her savings. In this case, her 401(k) account might drop by as much as 25 percent, and while that’s not good news, she wouldn’t lose everything.
“Don’t let fear drive your investment decisions,” I told her.
Given her situation, buying an annuity might not be in her best interests for several reasons:
- She doesn’t need more guaranteed income. Between her Social Security and her husband’s pension, they have sufficient guaranteed income to cover all their basic living expenses. They can afford to take some stock market risk with her savings to seek growth potential as protection against inflation.
- She won’t be tapping her 401(k) savings for at least five years because she plans to continue working at her current job until age 73. This gives her time to recover from any immediate stock market crashes.
- If she rolled her 401(k) account into an IRA, she would be required to start making at age 70-1/2, before she needs the money. If she leaves her accounts in her current employer’s 401(k) plan, she doesn’t need to make any withdrawals — not even a minimum — until she retires, even if she works beyond age 70-1/2.
- According to Morningstar, her Vanguard funds have an expense ratio of 0.09 percent, one of the lowest in the financial industry. A massive amount of research shows that reducing investment expenses is one of the best ways to maximize long-term investment returns.
And second, why the fiduciary rule would play an important role here.
An adviser who acts as a fiduciary would take the time to learn about a client’s circumstances before making recommendation, to make sure the advice is in the client’s best interests. This would be required by the DOL’s fiduciary rule, which mandates that advisers to act in the best interests of their clients.
This rule was scheduled to become effective earlier this year. However, the DOL recently announced a delay of its effective date until mid-2019, reacting to intense pressure from some companies in the financial industry and a request from the Trump administration.
Retirement planning decisions become more complex for, as my relative’s story illustrates. These are among the reasons the Obama administration implemented the fiduciary rule in the first place: to protect retirement savers from unscrupulous or unskilled financial advisers, some of whom are really no more than salespeople.
Given the rule’s delay and its potential watering down when it does take effect, what can retirement savers do to protect themselves? Start by asking any potential adviser one question: “Will you serve as a fiduciary and act in my best interests?”
If the answer is “Yes,” then it’s worth your time to ask more questions about their services, such as, and what’s their for generating retirement income. If the answer is “No,” politely stop the conversation and don’t consider this person. It’s that simple.
Fortunately, you can find reputable advisers (and financial institutions) who’ll gladly act as a fiduciary on your behalf. Examples include Financial Engines, the Garrett Planning Network, McLean Asset Management and United Income. Your job is to seek out these advisers and avoid those who won’t act in your best interest. It’s the free market in action.
Understanding the fiduciary rule and itson your savings is an important retirement planning task. As an investor, it’s your job to make your money work for you. In today’s world, you are the best person to act in your own best interest.