About the Fiduciary Standard
by Catherine Tims
You may have heard rumblings in the financial sector over the “Fiduciary Standard”. It’s about time, say some. But what exactly is the fiduciary standard, what prompted the new law, and how will it affect you?
New legislation will take effect next April requiring retirement fund advisors to take a fiduciary oath. They’ll have to swear that they’re doing their best by you, their client.
Doing Their Best by Clients: Weren't They Doing That Anyway?
The 2008 Stock Market Crash
The grim events that took place in 2008 caused a lot of people to worry about their retirement savings. Some people lost their shirt when the stock market crashed that year, and it was partly because their retirement funds were invested in very risky assets.
And these were people who thought they were playing it safe, investing in what they thought were solid, steady retirement packages that would set them up nicely when they retired. In other words, they weren’t in there day trading junk bonds or gaming the stock market with their iTrader accounts.
They were simply investing in their company-sponsored 401(k) plans or their own IRAs.
How Target Date Funds Got the Spotlight in 2008
Of course we all know: if you’re smart, you’re saving for retirement. For years now, a growing percentage of Americans have chosen Target Date Funds for their retirement savings, either through their IRAs or their 401(k)s.
Target Date Funds are a wonderful idea: the holdings in your account adjust for risk as you get nearer to your retirement date. That means less holdings are placed in stocks, the closer you get to retirement. It’s safer that way, since you have less time to recoup from a possible dip in the stock market.
And boy, did the stock market take a dip in 2008.
The problem was, some managers of Target Date funds weren’t easing back on the risk as target dates got closer. There were reports that, in the terrible days of 2008, when the stock market took a dramatic nosedive, some of the 2010 Target Date Funds held more than half their assets in equities!
There had always been criticism of the way some Target Date Funds were managed, both by the public and by those withing government.
“We had been warning for years prior to 2008 that most funds were ignoring the requirement to protect participants’ assets as they approached the retirement date by reducing equity exposure,”
Senator Herb Kohl (D) was one politician who was very vocal in calling for reform of the way retirement funds were managed and administered. He’d been complaining for years that things were amiss, and in 2008 he turned out to be absolutely correct on that count.
Here’s what he proposed, and which eventually came to be.
Senator Herb Kohl (D) Wanted Reform
Senator Kohl called for, among other things, a fiduciary standard for retirement planning professionals. With that in place, retirement fund managers couldn’t, in clear conscience, invest the bulk of retirement money for a 62-year old in risky stocks.
That was part of the big problem of 2008, of course.
It’s not clear why Target Fund managers put so much risk in funds where the client would need the money in just two years, as many did with the 2010 funds back in 2008.
But with the fiduciary oath in place, one thing will now be clear: what’s in a target date fund is, to the best of the manager’s knowledge, the best mix for the client. We think that’s good news… and plenty worth fussing about!
About the Author
Catherine Tims is a freelance writer and the owner of http://www.ivyleaguecontent.com