When Bad Financial Advice Pushes Seniors into Poverty
When you meet with a financial adviser, the advice you get may not be what’s best for you—it may be what’s best for them and their bottom line.
Fortunately, earlier this month at the Center for American Progress, the U.S. Department of Labor announced its final fiduciary rule that would require financial professionals who advise on how to invest retirement savings to act in their clients’ best interest. The fiduciary rule is much more than an obscure legal concept—it’s a commonsense action that closes 40-year-old loopholes in retirement security laws that were left open by Congress. It also returns at least $17 billion a year to American families.
Granted, struggling families are not likely to have access to retirement funds and financial advisers, so some may wonder how this helps low-income Americans. The fact is that faulty advice can leave individuals in poverty when they retire, even if they were able to save for retirement during their working years.
For example, Ruby H. of Philadelphia scrimped for 17 years to put aside $5,000 for retirement, and an adviser helped her grow that amount to $17,000. But when her adviser switched firms, he changed her investments into the ones most advantageous to him, and she lost everything. And Phil Ashburn lost the bulk of his savings after he spent 30 years working for utility companies: first Western Electric in 1972, and finally Pacific Bell. Offered a buyout in 2002, he was recommended to a financial adviser who put the value of his savings—about $355,000—in an expensive variable annuity. However, he ended up with only about 20 percent of those savings following the Great Recession. Meanwhile, the adviser received a commission of roughly 7 percent and ended up making $900,000 that year..
More than half of all working-age households are considered inadequately prepared for retirement.These stories are a painful reminder of why workers face such bleak prospects for retirement. Forty years ago, when the rules on retirement advice were first written, most workers didn’t have to worry about whether they were getting good advice because they weren’t expected to plan for their own retirement. The vast majority of workers with a retirement plan had traditional pensions, which rewarded a lifetime of work with monthly payments for life. There was no need to wade through different investment options and savings strategies. But today, with the erosion of pensions and advent of options that are far less secure, more than half of all working-age households are considered inadequately prepared for retirement, up from 31 percent in 1983.
The rule also reminds us why Social Security is so crucial, particularly in this era of financial uncertainty. Social Security brings the incomes of more than nearly 15 million elderly above the poverty line, cutting senior poverty by three-quarters. And for roughly two-thirds of the elderly, Social Security provides the majority of their retirement income. Future retirees need the assurance that Social Security will be there even if their savings, or their financial adviser, aren’t up to par. Thankfully, as Senator Brian Schatz (D-HI) noted during the Department of Labor’s announcement, cutting Social Security is no longer mainstream: “How much should we cut Social Security is such a preposterous proposition except on K Street, except among pundits.”
But while Social Security is safe for now, this fiduciary rule is under attack by some financial firms and their conservative allies. This disagreement isn’t unexpected. As Senator Elizabeth Warren (D-MA) has pointed out, there are “17 billion reasons” why special interests oppose the rule—that is, the $17 billion returned to the American people. In fact, from the beginning of discussions around the rule, some industry players have called it unworkable, argued that their voices were not heard, or threatened to sue. House Speaker Paul Ryan has also derided the rule, calling it “Obamacare for financial planning” and seeking to undo it. Given that his stated concern for the poor has often been accompanied by policy proposals to make drastic cuts to the safety net, perhaps this is not surprising. But, as the Department of Labor has stepped in to close loopholes of Congress’ own making after decades of improper financial advice, rolling back the fiduciary rule now will only increase retirees’ vulnerability in the coming years.
Some opponents have even gone so far as to claim that the reform will diminish working families’ access to financial advice because some advisers may stop working with less profitable savers if they cannot charge as much. But the fact is that most working families with small amounts of savings are not served by advisers today to begin with, and may have less trust in the advice that’s given in the first place. This same argument about access is a common defense for other predatory products—whether payday loans or for-profit colleges—in which the real question about access is whether companies can keep their access to the vulnerable consumers whom they grift. Meanwhile, new firms are offering independent, nonconflicted advice at a fraction of the cost, proving that it can indeed be done without ripping off current or future retirees.
This rule is a stark reminder for members of Congress to decide which side they are on: that of savers or of special interests. If they stand with Secretary Tom Perez and those who came out in favor of the rule, they have the opportunity to prevent bad financial advice from cheating more families out of their retirement dollars.