Financial investment professionals are not always looking out for the best interests of retirement investors, and more government oversight is needed to protect retirees from unfair investment practices, according to a new government watchdog study.
The US Government Accountability Office released a report Wednesday on how federal agencies can better oversee potential conflicts of interest between investors and retirees.
The report noted the interests of investment professionals and retirement investors often conflict because a financial professional may earn a commission from selling a product to a client, whether or not it makes money for the client.
Such conflicts, the report stated, “could create risks for millions of investors with over $18 trillion dollars in retirement savings in 401(k) plans and IRAs.”
The GAO found that financial professionals providing retirement investors fiduciary investment advice generally must avoid conflicts of interest, but clear rules often are lacking. The US Department of Labor issued a final rule in 2016 that expanded the definition of fiduciary investment advice, but the rule was vacated in 2018.
The report further found that efforts to provide more standardized compensation practices for financial professionals have not always been successful, potential conflicts of interest are not always clear or understood, and mutual funds that compensate financial professionals often are associated with lower average returns for investors.
The report recommended that the IRS develop and implement a process, independent of DOL referrals, for identifying prohibited transactions involving firms or financial professionals who are fiduciaries to IRAs and assessing applicable excise taxes, if necessary.
“DOL does not have authority to audit IRAs for prohibited transactions and, therefore, is generally unable to refer IRA fiduciaries to IRS for excise tax enforcement,” the report found. “Until the IRS implements an audit process for IRA fiduciaries, IRA investors may continue to be exposed to adverse impacts of prohibited transactions that can jeopardize their financial security in retirement.”
