Why does saving for retirement seem so challenging for many of us?
What kind of retirement account should you choose?
What should you be investing your hard earned money in? Where will it grow the fastest?
As a woman juggling a job and often children, how do you find time to plan for retirement and choose the right kind of investments? With all the information available online, in financial magazines and promotional information that comes in the mail, choosing the right retirement vehicle is a daunting task. Knowing the importance of planning ahead, many women rely on retirement advisors to guide them. Selecting the right plan (IRA, Roth IRA, SEP, 401 K) with the right investment (mutual fund, EFT’s and the like) requires time to study, evaluate risk and then complete the paperwork ALL before the tax day deadline! As a result, whether signing up at a bank or brokerage firm, many Americans seek retirement advice from licensed financial consultants.
Yet, unbeknownst to most of us, loopholes in the retirement advice rules have allowed brokers and other advisers to recommend products that put their own profits ahead of their clients’ best interest hurting millions of Americans and their families to the tune of $17 billion dollars per year! Enter the Department of Labor. On April 6th of this year, the DOL proposed a new ruling which prohibits financial consultants from taking advantage of their clients through hidden fees and backdoor payments.
Iit’s important to understand what this means in real dollars. As an example, a 1 percentage point lower return on your investment account could reduce your savings by more than a 25% over 35 years so that a $10,000 retirement investment that potentially grows to more than $38,000 over that period after adjusting for inflation, may in fact only result in just over $27,500. How can this happen? The hidden costs the new regulation are referring to can be in the form of an upfront sales charge, a back-end termination fee or an ongoing expense charge that ranges anywhere from .25% to 2%.
So what is an expense ratio you may ask?
An expense ratio is a calculation of the annualized operating costs of a mutual fund divided by the average dollar value of the fund's average net assets and expressed as a percentage. The operating costs include management fees, but do not include brokerage fees and transaction costs that also may contribute to a fund's total expense. Operating expenses are taken out of a fund's assets and lower the return to a fund's investors. For example, an expense ratio of 1% equals $10 of expenses for every $1,000 in assets.
Upon closer inspection, these expense charges can add up to thousands of dollars over the term of your investment. Here’s why: If 2% is charged up front on your initial investment of $10,000 that totals $200, but as the account appreciates and your funds grow to $18,000, each year the expense charge takes 2% or in this case, $360 as part of their operating expense and that is an ongoing charge. These are the hidden costs the DOL is trying to bring to the public’s attention.
Last year, President Obama called upon the Department of Labor to update the rules and requirements for retirement advisors to put the best interest of their clients above their own financial interests. He was quoted as saying “ It’s a very simple principle: You want to give financial advice, you’ve got to put your client’s interests first.” And while it is true that there is a large percentage of the population that is unprepared for retirement, the Department of Labor has decided to tighten their rules prohibiting financial consultants from taking advantage of their clients. The most vulnerable consumers are those looking to rollover assets from an employer plan. After years of contributions, you have accumulated a substantial nest egg only to fall victim to a less than scrupulous financial advisor looking to capitalize on a sale.
So what can a person do?
Ask questions such as these:
- Is there a sales charge associated with the recommendations the broker is suggesting?
- What is the ongoing expense ratio the invested assets will be charged each year?
- If you are working with an individual money manager, what percentage is he or she receiving each year?
- What is the risk rating (beta rating) of the recommended investments?
- Is there a back end charge if you decide to liquidate assets in the event funds are needed?
- Are the recommendations in keeping with your time frame so if the market takes a turn, you are not exposed to unrecoverable losses?
And consider investing in a no load mutual fund family such as Vanguard, T Rowe Price or Fidelity. With these fund families, there are no up front sales charge nor exorbitant expense ratios or hidden fees.
As a Moolah Doula, I focus on empowering women through knowledge. My clients learn all they need to know about investing, purchasing insurance and long term planning in order to make educated, thoughtful decisions. They prefer to educate themselves rather than give away their power to financial consultants or brokers. They have heard countless stories about people being sold “a great investment” only to suffer financial losses with little recourse. Knowledge is power and every woman has the freedom to make their own retirement decisions without paying fees to financial consultants who may be looking out for their own best interests. It remains to be seen the effect this ruling will have on how financial consultants continue to work with people once they are required to put the client’s interest before their own.