What New Rules on Retirement Savings Mean for Investors

The Labor Department’s new rules say advisers and brokers working with retirement accounts must act in their clients’ best interests.

The Labor Department introduced new rules on Wednesday that will help protect Americans saving for retirement. While investors often assume those handling their savings are providing advice in their best interest, that is not always the case. Here is how things will change.

What do the new rules mean for me?

Once the rules go into effect next year, all financial professionals who provide advice related to your retirement money must provide recommendations that are in your best interest. Acting in your best interest may seem obvious, but it hasn’t been required in most cases.

The new standard applies to all financial products that can potentially land inside a tax-advantaged retirement account — including I.R.A.s and 401(k)-type plans — from mutual funds to variable annuities.

How might my investment options change?

The new rules do not try to single out any one investment as a poor option. But the changes are likely to encourage more firms to steer customers toward lower-cost investments, notably index funds, a trend that is already well underway. The regulations are also expected to accelerate the movement away from commission-based investments and toward fee-based accounts.

More complex investments like variable annuities may fall off in sales. In response, insurance companies may adopt lower pricing, according to an industry report by the research firm Cerulli Associates, while emphasizing products that generate predictable income, including immediate and deferred-income annuities.

Does this rule mean that all financial advisers are now equal?

Absolutely not. Even though some may call themselves financial advisers, there are still various types of professionals with different legal requirements, expertise and credentials. It is still important that you work with an adviser who is equipped to address your entire financial picture.

What will change soon, however, is that all financial professionals who provide advice related to your retirement money must act as fiduciaries — the legal way of saying they are required to put their customers’ interests ahead of their own financial gain.

But the quality of the advice you receive can still vary based on the provider you are working with.

How do financial advisers differ?

This gets confusing, so brace yourself. Brokers are technically known as registered representatives. They are required only to recommend “suitable” investments based on an investor’s personal situation — age, investment goals and appetite for risk, among other things. But under the new rules, a broker who handles your retirement assets must act exclusively in your best interest, even if that will cost the broker some potential income.

As for the rest of your money, including regular brokerage accounts, that may still be subject to the lesser suitability standard.

To make matters more befuddling, there are some specific situations when brokers must act as fiduciaries for nonretirement accounts — for example, when they collect a percentage of total assets to manage an investment account, or when they are given full control of an investor’s account.

So does anyone have to look out for my best interests, 100 percent of the time?

Yes, indeed. Investment advisers, who generally must register with the Securities and Exchange Commission or a state securities regulator, must put their customers’ interests first, regardless of what accounts they work with.

You are still likely to get the purest advice from a financial planner who is paid a flat fee in which compensation is not tied to the sale of any one investment. Such advisers should be free to choose from a wide array of financial products.

Will financial firms have to mention competitors’ products?

No. If a salesperson sells only annuities that its own firm manufactures, he or she is not obligated to tell you about competing products on the market that they do not offer. As Labor Secretary Thomas E. Perez said on Tuesday, when you walk into a Ford dealership, you aren’t going to be told about Chevy down the block.

In an ideal world, all financial advisers would be able to choose the best investment for investors from a wide universe of products. But the rules do not aim to destroy the way existing firms do business — and some offer a limited menu.

Regulators will require firms that only sell proprietary products to fully disclose that they are only offering a restricted menu of products, and they must offer a best-interests contract to customers.

What happens when investors believe they have been misled?

If advisers do not adhere to the standards, retirement investors should have greater recourse to recover their money. They have the right to take legal action. Still, most disputes would be resolved in arbitration, not the courts, since most investment firms require that disputes be settled that way. Investors can also take part in class-action lawsuits.

Who exactly must adhere to the new rules?

Once the rules are enacted, anyone who provides investment advice for a fee must act as a fiduciary.

Not every word an adviser mutters will be subject to the fiduciary rule. But once he or she makes a recommendation — or suggests a particular course of action — the adviser is required to act solely in the customer’s best interest.

When do the rules take effect?

Financial professionals must act as fiduciaries beginning in April 2017. But they won’t have to adopt all of the required procedures until Jan. 1, 2018.

What about advice that I’ve already received?

Any recommendations provided before April 2017 are subject to the old, less stringent rules.

But all new money being invested must be in the best interest of the client; the same goes for any new recommendations on money already invested. If you have concerns, tell your adviser you want him or her to act as a fiduciary.

Why do I need to sign a contract with my adviser?

There are conflicts of interest embedded in the way many brokerage and insurance firms do business. The new rules allow them to continue to receive the types of compensation that pose conflicts, like being paid commissions.

But those firms will need to provide an enforceable contract that promises to put your interests first. The firm must also disclose those conflicts, charge only reasonable compensation, tell investors how they are paid on its website and adopt appropriate policies to comply with the new rules.

Regulators said the contract — which won’t be required until 2018 — can be signed at the same time you complete other paperwork to open an account. (Any advice provided before signing must still be impartial and in the customer’s best interest.)

Existing customers might receive an email from the firms they already do business with, acknowledging the customer’s new rights. No action is necessary, unless you object to the notice’s terms.

Could the rule still be blocked?

It’s possible. The financial services and insurance industries have aggressively lobbied against the rule, and they could take legal action. For now, various industry associations said they were still parsing all the details.

Congress could also try to kill the rule, but President Obama has said he would veto any legislation. If a Republican were to win the presidency and take over in early 2017, when the rule is still being implemented, the new administration could try to dismantle the regulations.

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