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Here’s our recap:
Only a fiduciary is bound to act in your best interest
It is currently legal for financial advisers to put their own interests ahead of their clients’ -- unless they are a fiduciary. What is a fiduciary? Fiduciaries is the legal term for a broad group of professionals who are required to put customers' interests first. They cannot accept compensation or payments that would create a conflict of interest.
As Oliver points out, some brokers receive sales incentives including cruises, luxury watches, and even tacky-Superbowl-style rings. Since advisers aren’t currently bound to act in your best interest, they can steer you to make investments that benefit them but might not be the best choice for your retirement savings.
“According to conservative estimates, more than $17 billion is unnecessarily lost every year from retirement savings under our current system due to conflicted investment advice. Over decades, putting this money back into the investment accounts of savers will mean the difference between scrambling to make ends meet well into retirement years and a financially secure future for millions of Americans,” said U.S. PIRG federal legislative director, Jerry Slominski in a statement.
While 401(k)s are often a good option, these retirement accounts may be subject to fees associated some plans. High fees compound over time -- if you’re paying a 2 percent fee, you could be losing two-thirds of savings over a fifty-year time period.
Actively managed funds aren’t the answer
For a high fee, you could choose an actively managed fund, through which Wall Street professionals pick and choose stocks for you trying to beat the market. The problem? Even many Wall Street experts find it difficult to consistently produce a better return than the market average.
The other option is a low-fee, index funds. Index funds are not targeted towards returns, instead they simply invest in the companies of a particular index, like the Dow. You can buy a targeted index fund –- like small or large companies. The index fund managers do not spend time trying to game the market; they simply buy a list of stocks. They then get the average return for that class of stock.
As Oliver explains, the actively managed fund option can sometimes lead to embarrassing results. A cat named Orlando ended up picking better stocks than Wall Street professionals. The cat’s picks returned nearly 11 percent and the pros gained 3.5 percent. This cat is an example of growing evidence that over the long term, most managed funds do no better and often do worse than the market.
Warren Buffet demonstrated index funds’ successes with a million dollar bet against hedge funds, which are highly active funds with very high costs. Over an eight year span, Buffet’s index funds outperformed the hedge funds. Buffet’s index funds are currently up 66 percent and the hedge funds are only up 22 percent.
The good news?
In April, the Department of Labor came out with a rule requiring all advisers handling retirement accounts to act as fiduciaries beginning next year. The financial services industry fought this rule hard and launched attack ads. Thankfully, President Obama has vetoed a resolution from the House and Senate to overturn the fiduciary rule.
This is a major victory for workers and retirees saving and investing for a secure and dignified retirement. Sign our petition here to tell your member of Congress to support the retirement rule.
According to Last Week Tonight, here are five things to remember when saving for retirement:
- Start saving now -– or ten years ago
- Low-cost funds are the best way to go -– invest and leave it alone
- Ask if your adviser is a fiduciary; if they are not, run away
- As you get older, shift your investments from stocks to bonds
- Keep your fees under one percent
Tools & Resources
DEFEND THE CFPB
Tell your representative to oppose the “Financial CHOICE Act,” which would gut Wall Street reforms and destroy the Consumer Financial Protection Bureau as we know it.
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