What is 26(f) and should I invest in it as a Retiree or Pre-Retiree?

There have been a lot of questions coming through about what is a 26(f) and whether or not you should invest in it, especially if you are near or in retirement. If you don’t know what a 26(f) is, that’s ok, and there is no need to really research it. There have been claims along with the 26(f) that there will be a “retirement blackout” on April 10th of 2017 and that is why you need to invest in a 26(f). There are also claims that you can generate $60,000 or more of income from a 26(f) and the top investors use it, such as Warren Buffet and the like. So what is this secret loophole they are talking about and how do you avoid this “retirement blackout”? I’ll explain what a 26(f) is and what this blackout for retirees is.

First off, let me start with that there will not be a “retirement blackout”. The people marketing this seem to have taken a marketing tactic from the recent presidential elections handbook. One, to instill fear in Baby Boomer and retirees, and number two, splice up a bunch of things to make it seem relevant. The “retirement blackout” is in reference to the DOL (Department of Labor) ruling that is becoming effective on April 10th of 2017. That rule will make all financial advisors “Fiduciaries”. That means that the broker or advisor has to put you, as an investor, best interests before their own. Now you may have thought that might have already been a rule, and it was for some, but only a few. Such as Invest Advisor Representatives and Certified Financial Planners™ have to be fiduciaries at all times. The rule will now make all advisors and brokers fiduciaries which is where they are saying that you, as a potential investor that is looking to retire, may no longer have access to advisors and brokers because of the rule and may no longer receive any advice.

That is simply not true. It will change the landscape as far as how brokers and advisors get paid and how fees come out of the funds as well as explanation of fees and conflicts of interest, but it will not block you from being able to get retirement advice. It may put extra regulations in place that haven’t been in the past, that is where the controversy is. Part of the concern is that if you do not have a lot of money, then you also may no longer have access to an advisor because they won’t take you on as a client now because all of a sudden, they have to act in your best interests now. They are also saying you won’t have access to investments because they won’t want to take on the burden.

Let’s back up and understand why this rule came about. Since 2008, a lot of people have still yet to recover in some investments, such as Real Estate Investment Trusts (REIT), Variable Annuities, and some Mutual Funds and Stocks to be more specific. These investments were sold because they sounded great, retirees were promised high returns, and were pitched as relatively safe when in reality they weren’t. The reason they were pushed hard by brokers is because they made a good commission on it. Also, mutual funds were sold more with and up front commission so you started at a loss. Variable annuities have had high fees in them so and were misrepresented based on the guarantees that are in the contract. These investments are not bad in certain situations however, they were usually sold in the wrong manner because the broker was usually incentivized to do so instead of using an investment for part of the clients retirement plan. Which in return, made a lot of people upset and trickled all the way up to the White House to which then they made some rulings to protect you, the consumer.

How will this change the landscape for you and potentially cause a “retirement blackout”? It just means they won’t be able to offer these investments anymore without having an repercussions if something went wrong or was misrepresented and more than likely will no longer receive a large commission. At the end of the day, good or bad, it will most likely help the consumer, but put more burden on the financial advisor if they weren’t a fiduciary in the first place. It could mean that the advisor becomes more selective with who they choose to work with. It may even cause the financial advisor to leave the industry because it has become too much a change for them.

Now what about this 26(f) they are talking about? Sound likes something that is too good to be true? As the old saying goes, if it sounds too good to be true, it usually is. You can also follow up with the question, “What’s the catch?” Well you can do a 26(f) if you want to, but it isn’t the magic pill that is going to make you rich. If it was, I would of found it already and I wouldn’t be writing this article and I would already be retired! The basic concept behind this fancy number with a letter is that you consistently put money in to an investment, such as a mutual fund. You can also use another investment if you want such as the “bank on yourself idea” with life insurance. The mutual fund idea or stock idea is using the dollar cost averaging technique and is also saying that you have saved money to grow so that you can safely withdraw the money when you decide to retire. They make it sound like it is a really safe technique and that you can get outrageous returns. Again, if it sounds too good to be true, it usually is. So how did someone get great returns? Again, with the dollar cost averaging by putting money in to an investment month after month, year after year, they bought the stocks and mutual funds at low and high points. This was not a get rich quick or retire quick technique.

The success to this strategy is to continue to invest and add money to a plan. The 26(f) is more in reference to a mutual fund plan that will be hard to offer after April 10th, 2017, when the fiduciary rule comes outs. Are you really missing much? Nope, not at all. You can do the same thing without this 26(f) and you will still be able to get retirement advice. Financial advisors will now be held to higher standards, and this 26(f) crazy marketing tactics will no longer be able to be offered. I understand it is hard to get a clear cut answer with all the rule changes going around congress. The fiduciary rule has been a hot topic for financial advisors over the last year, and it will change the landscape for most, but that doesn’t mean you are going to be forced out from getting advice or not being able to invest in the market and still have a successful retirement.

If you are forced out by your previous advisor, there are other advisors that will be able and willing to help you. The Fiduciary rule and the 26f is just noise in the financial landscape, but there is no need to panic. Before you go in to any investment, make sure you understand what it is, and more importantly, how it works with your overall retirement plan.

Video Transcription

Hi, Vince Oldre, Certified Financial Planner, and I want to talk to you about one of the hot topics today. It’s called a 26F. Now, I’ve received some emails from my clients about what a 26F is and should they invest in it, because there seems to be some sort of panic around it. That is because after April 10, supposedly they can no longer offer a 26F. Now after April 10, what’s happening? Well, after April 10, all financial advisors will have to be a fiduciary. That means they have to put your interests before their own. Before, we had a suitability standard. A suitability standard meant that they only had to offer you what was suitable for you. That doesn’t mean that’s what’s best for you. It just means it had to be suitable for you. But now, they will all have to be a fiduciary, which means they have to put your interests first.
Now 26F, the reason why it gets a little more confusing and why they can’t offer it after April 10 is because of the commission structure and how those were set up. Sometimes we use a bank on your self strategy or a mutual fund where we were taking $100 or $200 or $50 a month and putting it into this mutual fund on more of a contractual basis. If you did that, the advisor was given it as commission, but now that is more of a conflict of interest and they’re not allowing those types of things to be available after April 10. Now, you can still utilize a similar tactic like a bank on your self strategy or some people will use life insurance strategies, but before you buy any type of investment, if you’re not sure what it is, don’t invest in it number one. Number two, understand how it’s going to work with your overall retirement plan. Even if it sounds really great, make sure you understand how it’s going to work with your overall retirement plan.
The other thing you need to be concerned about when looking at a 26F is are they offering you a product that’s in your best interest. If it’s not, it’s probably something you want to stay away from. Now usually this is just market noise or this is financial industry noise trying to get you to jump onto something that you’ve never heard of. It’s not a get rich quick investment, although they kind of make it sound like that, but anytime things like this come up, always know that there could be a catch or always know that you need to understand how that investment is going to work with your overall retirement plan.
If you want to make sure you get more information about what a retirement plan might look like for you and what things you might want to use, we invite you to one of our workshops. We host them at a couple different restaurants as well as we have a retirement one on one workshop where we host at a local university. If you want to attend, please give our office a call or click on our events page on our website and we’ll make sure we get your registered and you can start creating your own retirement plan. Until then, I look forward to speaking with you.

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What is 26(f) and should I invest in it as a Retiree or Pre-Retiree?
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