protected growth that fixed annuities can provide relative to other solutions , like CDs .” Indeed , lower interest rates will depress the yields on most other “ safe ” investments , such as Treasury bonds and cash accounts , notes David Blanchett , Lexington , Ky . -based head of retirement research at PGIM , the investment management group of Prudential .
Blanchett points to a potential rise in annuity demand from new sources . For example , many fee-based advisors have started recommending annuities to their clients now that there are more low-cost , zero-commission products available , he says .
Another possible source of growth for annuities , he says , is 401 ( k ) s . The SECURE
Act made it easier for employer-sponsored retirement accounts to offer annuities to members by essentially extending legal protections against annuity providers that go bankrupt . For all these reasons , says Blanchett , annuity demand might keep rising “ even if payouts and rates do decline .”
— Ben Mattlin
GAO Undercover Probe Finds ‘ Many Complex Conflicts ’ In Advisor IRA Advice
IRA rollovers recommended by fiduciaries , including investment advisors , are marred by conflicts of interest that often go undetected by regulators , according to a report by the U . S . Government Accountability Office . The agency went undercover to call financial professionals while posing as investors to generate its report , which it released in July .
The GAO suggests that agencies like the Department of Labor and the Internal Revenue Service need to increase their engagement when it comes to policing conflicted advice , arguing that these agencies are not overseeing costly advice to the degree necessary .
“ Our review of 2,000 conflict disclosures [ from 15,000 firms ] and our calls posing as potential clients to 75 financial professionals found many complex conflicts that can be difficult to explain ” in IRAs , the GAO said in its report , entitled , “ Retirement Investments : Agencies Can Better Oversee Conflicts of Interest Between Fiduciaries and Investors .”
“ We also found mutual funds that paid financial professionals were associated with lower returns for investors ,” said the GAO , an agency in the government ’ s legislative branch .
Specifically , the agency analyzed Morningstar mutual fund data from 2018 to 2021 , looking at funds that gave financial professionals compensation for moving client money into their products . That activity led to lower average returns before fees , the GAO said .
The practice is “ a proxy for conflicts ... that could reduce retirement savings ’ growth over time and could make a difference of tens of thousands of dollars for investors in actively managed domestic equity funds at retirement ,” the GAO said .
The agency said it undertook the study because , while “ it ’ s a known fact that the interests of financial professionals and firms often conflict with the interests of retirement investors , this could create risks for millions of investors with over $ 18 trillion dollars in retirement savings in 401 ( k ) plans and IRAs .”
The agency said that IRA fiduciary oversight and the detection of conflicts is lacking across the board . By law , the IRS has sole enforcement authority over firms and financial professionals acting as fiduciaries under the Internal Revenue Code for individual retirement accounts . But the way the conflicts are analyzed , the problems fall through the cracks , the GAO suggested .
The IRS ’ s detection relies solely on IRA fiduciaries ’ self-reporting to the agency and paying the applicable excise tax , according to IRS officials . According to the GAO , Internal Revenue Service officials said their practice for IRA fiduciaries is to enforce prohibited transactions that the Department of Labor refers to them .
The Department of Labor , however , “ 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 . Until 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 ,” the GAO said .
Because of the IRS ’ s limitations in detecting conflicts , the Government Accountability Office said the IRS commissioner “ should develop and implement a process independent of DOL referrals for identifying non-exempt prohibited transactions involving firms or financial professionals who are fiduciaries to IRAs and assessing applicable excise taxes .”
More vigilant IRS oversight should include the IRS checking compliance during income tax audits of financial services firms , the watchdog argued .
The agency found that the conflicts of interest disclosures that firms and advisors deliver to investors are not always clear or understood .
The GAO also recommended that the IRS commissioner “ coordinate with DOL through a formal means , such as a memorandum of understanding , on non-exempt prohibited transactions involving firms and financial professionals who are IRA fiduciaries and owe excise tax .”
The agency found that the conflicts of interest disclosures that firms and advisors deliver to investors are not always clear or understood .
— Tracey Longo
OCTOBER 2024 | FINANCIAL ADVISOR MAGAZINE | 13