A Q&A document about small individual retirement account (IRA) savers by the Department of Labor (DOL) takes a look at the interplay of IRA-holders, rollovers and access to professional advice.

Most people think owners of small-balance IRAs are individuals or households with minimal assets, but this is a fallacy. According to the DOL’s report, households in the lower half of income distribution hold less than one-third of small IRAs. The reason? These households are much likelier to use work-based plans to save for retirement. Just 10% of households in the bottom half of the income distribution own any IRA assets, compared with 25% who have assets in a job-based plan.

Small-balance IRAs are mostly held by wealthy and upper-middle-class households—which hold more than two-thirds of these accounts—that are generally homeowners, for whom these assets usually constitute a component of a larger financial portfolio, such as a job-based defined contribution (DC) plan, stocks and mutual funds.

Middle- and working-class small savers in the bottom half of the income distribution are most at risk from conflicts of interest because of their limited ability to absorb financial losses, the DOL contends. The rollover process—by which they generally enter the IRA market—leaves them vulnerable to conflicted advice, because they are least able to absorb the costs of hidden fees and lower returns.

Losing money through conflicts of interest can happen to savers of any size, the DOL points out, but low- and middle-income small savers are particularly vulnerable to the negative impacts. These losses can have a real and significant impact on a smaller saver’s ability to achieve economic security in retirement.

The DOL is particularly concerned with those low- and middle-income workers and families that enter the IRA marketplace through rollovers from a workplace-based retirement plan. Small savers depend heavily on these plans to do most of their saving, so rolling over these assets is one of the most important financial decisions they can make. Right now, the DOL contends, many retirement investment advisers do not have to adhere to fiduciary standards when giving rollover advice, and depending on the arrangement, their advice does not have to be in the saver’s best interest.

Receiving advice in the existing IRA market varies, depending on the amount of assets, the DOL points out, and low- and middle-income small savers may have access to different services and levels of service than those with higher balances. The phrases “financial advice” or “professional adviser” to most people means some type of full-service personalized financial advice, but according to the DOL, low- and middle-income small savers do not receive this advice.

When it comes to advice, size matters, the DOL points out. Large investment firms, with account balance minimums in the hundreds of thousands of dollars, generally don’t offer these services to individuals with investable assets of $50,000, $25,000 or lower, but instead steer these investors to call centers or online services.

Many savers of modest means frequently turn to other lower-cost options instead of full-service professional advice from professional advisers. Data from the Survey of Consumer Finances show that very few households with low incomes or small IRAs seek financial advice from brokers, with many more looking to friends or relatives, bankers and the Internet for advice.

Among non-elderly households in the bottom 25% of earners, only 4% used brokers for financial advice, while 43% turned to friends or relatives, 32% turned to bankers, 28% looked online, 15% sought advice from financial planners, and even fewer sought it from print media or television and radio. Even when looking at all owners of small IRAs—whether low-, middle-, or upper-income—only 15% seek financial advice from brokers. In short, according to the DOL, low- and middle-income small savers generally do not receive the kind of detailed personalized advice that many envision when they think of financial advice.

The DOL emphasizes that the fiduciary re-proposal not only clearly allows for all savers to continuing receiving retirement and investment education, but in fact would improve the quality of advice for savers because of additional clarity about the distinctions between education and advice.

General retirement and investment education can be provided to all savers, large or small, without triggering fiduciary responsibility, the DOL states. Education can include information about the importance of saving, how retirement plans work, and how the mix of investments should change as someone ages. Information about assessing risk tolerance, historic differences in rates of return between different types of investments, and how to estimate how much income a person will need in retirement are also cited as acceptable types of education by the DOL—none of which will trigger any fiduciary responsibilities on the part of the adviser.

The proposed rule also seeks to provide greater clarity about the line between education and advice than existed before, so that savers, advisers, and plan sponsors can be more certain of where one ends and the other begins. In particular, the new rule will help clarify where this boundary lies when it comes to advice and education concerning rollovers and distributions. By helping more advisers understand these distinctions, the Department believes the proposed rule will increase the quality of the education provided to savers which in turn can help them make more well-informed financial decisions. Such high-quality education can be particularly beneficial to low- and middle-income small savers who have less financial experience and may be less familiar with the investment landscape.

Nothing in the proposed rule prevents advisers from providing financial advice to small savers, the DOL emphasizes. Advisers will be able to deliver advice to all savers and charge for the costs of the advice delivered. The only difference is that advice must now be in the savers’ best interests.

The Department also believes the proposed rule may actually lead more small savers to seek out financial advice, as they will be able to trust that the recommendations they are receiving are being provided to them with their best interests in mind.

In a survey sponsored by TIAA-CREF,  64% of respondents said it was hard to know what sources can be trusted—a larger number than pointed to any other obstacle to getting good advice. Other research has shown that investors identify trust as the most important quality in professional financial advisers and that financial trust is correlated with both the usage of advice and the likelihood of seeking out professional advice.

The DOL’s Q&A can be viewed here.