It should come as no surprise that President Obama is no fan of tax-neutral, defined contribution savings plans.
After all, this is the same president who secretly tried to destroy the 529 college savings plan for the middle class back in January 2015. His budget routinely calls for a lifetime accumulation cap on 401(k) plans.
Now Obama’s own Department of Labor is pushing a series of new regulations that will have the effect of shutting out newer investors and younger investors from the world of IRAs.
Among other huge problems, this “fiduciary rule” will result in the following:
IRA companies won’t be able to even talk to potential investors. Under the rule, if a brokerage company wanted to pitch a Traditional IRA or a Roth IRA to a new investor, they first have to get the prospective investor to sign a bunch of cumbersome paperwork and waivers. No one is going to want to do that, and investors will simply not take the time and effort.
IRA companies won’t be able to recommend specific investments for your IRA. Even if you’re already a customer at a brokerage firm, the company won’t be able to make specific investment recommendations within your IRA. Suppose you don’t know which mutual fund to buy from the thousands out there? You’re out of luck and you’re on your own. After all, robots and search engines are always an option.
You can’t get advice on rolling over your 401(k) to an IRA. One of the most intimidating things people do–for fear of screwing it up and wrecking years of retirement and tax planning–is rolling their old 401(k) into an IRA. Thankfully, the IRA companies have experts who can help guide you through the process without a hitch. Until now. These regulations prevent any advice related to IRA rollover. Again, you’re on your own.
Small business employees and companies can’t get any expert advice on investing. IRA companies also often help smaller firms (fewer than 100 employees) set up 401(k)s, SIMPLEs, and other workplace defined contribution retirement plans. Under the regulation, neither the employer nor the employees could get advice on how to invest in these plans. Again, you’re sensing a theme here–you’re on your own.
As a result of these regulations, several bad outcomes will occur for taxpayers:
The number of people wanting to bother with IRAs will go down. We’ve seen this before. After the Tax Reform Act of 1986, IRAs were curtailed. IRA contributions and participation plummeted. If you take away help from people in managing their IRAs, they will either not save at all, or will save in taxable brokerage accounts where they face capital gains and dividends taxes.
Capital gain and dividend taxes today run as high as 23.8 percent on the federal side alone. Compare that, say to a Roth IRA which never faces any tax on earnings if used for retirement. The resulting tax hit will result in high effective tax rates on the savings, and several years of delayed retirement, all else being equal.
Smaller and younger investors will be shut out. These regulations seem targeted at the younger and smaller end of the IRA investment world. That’s because the regulations essentially force brokerages to migrate IRA products to a percentage-of-assets payment system, as opposed to a system of per-trade commissions. Most financial advisors, however, have a minimum amount of assets (usually at least $50,000 or $100,000) before they will be compensated this way–there’s just not the economy of scale.
Smaller investors will face a horrible choice–pay higher fees in order to keep essential financial advice, or be shut out and on their own.
With 58 percent of small investors seeking financial advice today, there are millions who stand to lose a key source of expertise. Up to 7 million IRAs would not qualify for investment advice under these regulations.
As a result, recent college graduates and workers on the lower end of the earnings spectrum will find themselves shut out from investment advice. These are precisely the people who need it the most.
All of us will pay more. The IRA industry estimates that these regulations will cost $5 billion to implement, and $1 billion annually to maintain.
Companies don’t pay taxes–people do. In this case, these deadweight regulatory costs of government will inevitably trickle down to higher investment fees for all of us.
Small businesses won’t open retirement plans and employees won’t invest with any confidence. Small businesses have a lot to worry about. For many, setting up a retirement plan is a luxury when they are trying to meet payroll month to month.
If they cannot get expert advice on these plans, small firms simply won’t make them available. Even if they are set up, employees usually have no idea how to invest. Without expert advice, they are likely to either not participate or have their money sitting as cash.
Massive leakage from workplace retirement plans. Because people will no longer be able to get advice from IRA companies about how to do rollovers, the logical response will either be to keep 401(k) assets at their old employers (which can result in losing track of them), or more likely a cash-out. The latter results in taxes plus a ten percentage point penalty. More importantly, it can short-circuit a lifetime of retirement savings.
According to one study, between 300,000 and 400,000 fewer IRAs will be opened every year as a result of this regulation.
Why is President Obama and his Department of Labor doing this? Quite simply, they don’t trust people to manage their own retirement savings. They would rather have most Americans rely on a combination of Social Security and union-dominated traditional pension plans. Not coincidentally, the latter group (unions) happens to be the biggest supporter of President Obama and his allies.
Just like the American people had to rise up in defense of their 529 college savings accounts, now is the time for them to rise up in defense of their IRAs, be they rollover IRAs, Traditional IRAs, spousal IRAs, or Roth IRAs. They need to rise up in defense of their workplace 401(k)s, SIMPLEs, and SEPs.
Building a nest egg for financial independence in retirement is a key cornerstone of the middle class American dream. President Obama’s “fiduciary rule” aims to take it away. Don’t let him.