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The Department of Labor issued a new regulation on Monday designed to improve access to expert advice for workers who contribute to 401(k) plans and individual retirement accounts (IRAs). The regulation is expected to make it easier for providers to offer their own investment advice for individual accounts, and allows them to even bundle investment advice together with other retirement services.

Employers Can Provide Investment Advise on 401(k) and IRA Plans

Prior to the new rule, when an employer provided a retirement plan via a major investment firm such as Vanguard, Charles Schwab or Principal Financial, that employer was not permitted to offer investment advice regarding the plan.

Instead, the employer was required to contract with a separate independent investment adviser. The logic behind this requirement was that employers could potentially advise plan-holders to opt for the employer’s own mutual funds and investment services, resulting in a conflict of interest as the employer would benefit financially from their investment advice.

Now, the new regulation issued will allow employers to provide their own investment advice to plan-holders, giving workers access to more immediate investment advice, rather than having to contact the contractor hired by the company.

Regulation Requires Unbiased Retirement Plan Investment Advice

According to the new rule, if companies choose to offer their own investment advice to workers rather than hiring an outside contractor, the advice must be proven unbiased. Annual audits will be conducted to ensure companies follow an unbiased computer model, or are able to prove that their compensation has not been affected by an investment recommendation.

The Department of Labor estimates that the new rule may affect about 17 million 401(k) retirement plans, with about 3.5 million of the participants seeking investment advice. Additionally, the Department of Labor estimates about 17 million IRA beneficiaries may take advantage of the new regulation.

Small companies in particular are expected to begin advising workers since many have not taken this option in the past due to the high cost of seeking outside investment assistance.

The Department of Labor hopes workers will choose to seek investment advice as it has proven to impact retirement accounts in a positive way. The government estimates investment mistakes will be reduced by $7 billion to $18 billion a year with more people receiving assistance.

The new regulation is set to take effect on Dec. 27.
Information provided by gobankingrates.com

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