Retirement savers could hold on to tens of thousands of dollars more over their lifetimes thanks to a new rule published today by the U.S. Department of Labor.

The new "fiduciary rule," one of the most important investor protections in decades, requires that financial advisers who provide investment advice on retirement accounts act in their clients' best interest. 

You may have thought that all financial advisers act in their clients' best interests. But that hasn't necessarily been the case.

While savers have long been able to turn to fee-only advisers (also known as fiduciaries) who did act in their best interest, they also had the option of using commission-based advisers, such as stock brokers, who were only required to adhere to what is known as a "suitablity standard." That meant they could provide their clients with investment options that were considered suitable for their needs, but might come with high fees that benefited the advisers.

Under the new rules, which fully go into effect by January 2018, all financial advisers, whether fee-only or commission-based, will have to adhere to the same standards. They are required to make customers aware of their right to complete information on the fees charged and direct them to a web page or written material disclosing compensation arrangements.

Advisers will be required to charge only a "reasonable" compensation. In addition, they must avoid misleading statements about fees and disclose any conflicts of interest. 

They can also be held accountable for not following the rules. If an adviser does not act in a client's best interest on an IRA rollover, for example, the client can sue for breach of contract.

Labor Secretary Thomas E. Perez said at a press conference yesterday that the "rule ensures that putting clients first is no longer just a marketing slogan, it's the law. This is a good day for Main Street and for middle-class America."

Lower Costs for Savers

To illustrate how devastating high fees can be, Perez explained how Elaine and Merlin Toffel, a married couple in Lindenhurst, Ill., were convinced by a financial adviser at their bank to roll over a nest egg worth $600,000 into three variable annuities. Those annuities came with stiff annual commissions and surrender charges for early withdrawal.

When Merlin Toffel needed to go to a nursing home, the couple had to take money out of their investments. The move ended up costing them more than $50,000 in fees.

Others have suffered similar losses. The Labor Department estimates that when financial advisers choose investment products that come with high fees and commissions, they reduce the returns of retirement savers by an average of 1 percent a year, or about $17 billion annually.

An analysis by the President’s Council of Economic Advisers last year showed that a typical working person who got this kind of "conflicted advice" when rolling over a 401(k) balance to an IRA at age 45 could lose about 17 percent from that account because of fees by the time he reached the age of 65. A $100,000 rollover, with the potential to grow to $216,000 in those 20 years would instead grow to just $179,000.

The council noted that people who work with financial advisers earning money from commissions and fees could run out of their retirement savings five years sooner, under some circumstances, than if they had worked with an adviser who acted in their best interest.

The Labor Department, which regulates retirement accounts such as IRAs and 401(k)s, first proposed a change to the rules in 2010. Perez said that the rule's final incarnation, proposed last April, was the result of information gathered from more than 100 meetings, four days of hearings, and over 3,000 comments from interested parties, including the investment community and consumer groups such as Consumers Union, the policy and advocacy arm of Consumer Reports.

“The old rules were outdated, and these changes are long overdue," says Pamela Banks, senior policy counsel of Consumers Union. "As we review the details of these final rules, we are optimistic that they will help put consumers first, and remove conflicts that can jeopardize a happy, financially healthy retirement.”