Your retirement savings and lifetime income could increase by thousands of dollars, thanks to the new fiduciary rules released on April 6 by the U.S. Department of Labor. They require a financial adviser to place your interests first when making recommendations for investing your 401(k) accounts or IRA. The rules aim to reduce situations in which advisers makes recommendations that compromise your financial success as a result of the manner in which they're paid.
The new fiduciary rules play an important role in your retirement planning, which you can see by taking a closer look at three important decisions most people have to make regarding how to maximize financial security in retirement.
Should you roll your 401(k) account to an IRA?
When you terminate or retire from your employer, you face a choice: You can keep your account invested in your former employer's plan, or you can roll your account to a financial institution's IRA.
You might do better by leaving your accounts with your current employer if it offers low-cost index funds that aren't available to you in retail investing situations. Advisers may tell you that higher-cost funds are justified because they earn superior investing returns, but plenty of evidence shows that low-cost index funds actually outperform higher-cost, actively managed funds over long periods of time.
If your adviser recommends that you roll your 401(k) account to an IRA, you'll want to ask two questions:
- How do the costs and performance of the funds in your 401(k) plan compare to the funds your adviser may be recommending? This comparison should be straightforward because 401(k) plans are required to disclose the performance and costs of their funds, and this information is often online.
- How does this decision affect the compensation the adviser receives? One common way for advisers to be paid is by charging a percentage of your assets that are under the adviser's management. As a result, they'll be paid if you roll funds to an IRA, but not if you keep your funds in your employer's 401(k) plan.
Should you generate retirement income through an annuity or invested assets?
When it's time to deploy your hard-earned savings into reliable, lifetime retirement income, you face another choice:
- You can buy an annuity that guarantees a lifetime retirement income and protects your income from stock market crashes, or
- You can invest and draw down your savings, which gives you the potential to increase your income with favorable stock market returns. But it also comes with two risks: that poor returns could reduce your income or that you could outlive your savings.
There's no right or wrong answer to these decisions -- both are reasonable methods for you to generate retirement income, and each has its pros and cons. In addition, there's support for a diversified approach to building a retirement income portfolio that may allocate portions of your savings to both methods.
Advisers who deal exclusively with one method of generating retirement income will be unable to advise you on the best method that applies to your goals and circumstances. For instance, advisers who are paid a percentage of assets under management may not like annuities because an annuity remove assets under management. On the other hand, advisers who receive a commission on the sale of annuity products may not favor investing solutions.
You'll want to ask how your adviser's recommendations best serve your unique goals and circumstances. To understand the answer, you'll want to learn the basics of both methods of generating retirement income.
Should you use your savings to optimize your Social Security benefits?
Plenty of evidence shows that in many situations, you'll receive more income over your lifetime if you delay your Social Security benefits as long as possible (but no later than age 70), with certain exceptions. It may pay to start Social Security benefits earlier if you're single and in poor health, or if you're married but haven't been the primary wage earner.
An adviser may be able to help you make the most effective decision to optimize your Social Security benefits. If you retire before age 70 but delay starting Social Security until then, it's a good use of your retirement savings to help pay for living expenses while you wait. But using your savings this way has the potential to reduce the adviser's assets under management, thereby reducing compensation.
Your adviser may also tell you can boost your retirement income by starting Social Security earlier than age 70 and investing your savings. This strategy has a chance of succeeding only if you invest significantly in stocks, which means you're taking on serious stock market risk. And if you invest your savings in bonds, chances are very low this strategy will produce higher income compared to delaying your Social Security benefits.
In all of these scenarios, it pays for you to be aware of how your adviser is paid and the potential influences on the recommendations you may get. The new rules don't go fully into effect until 2018, but you don't need to wait to make more effective decisions in these areas. If you're working with a financial adviser, ask now how the recommendations you get will best serve your goals and circumstances.
Don't be shy -- it's your money and your retirement.