Employee Benefits News examines legal developments that impact the employee benefits and executive compensation employers provide, including federal and state legislation, rules from federal...
By Dave Michaels and Angela Greiling Keane
Feb. 23 — President Barack Obama threw the weight of the White House behind an effort that would make it harder for brokers to push higher-fee mutual funds or other expensive products on people saving for retirement.
The plan to be issued by the Labor Department would require brokers to act in a customer's best interest, a change that could limit the earnings of financial advisers in the handling of Americans' $11 trillion of retirement savings.
The president said the current regulations are out of date, devised in the era when most Americans could count on a traditional pension from employers. Through self-directed retirement accounts, some brokers are skimming significant sums annually from small investors, he said.
“Financial advisers absolutely deserve fair compensation,” he said in remarks Feb. 23 to the AARP, the nation's biggest lobby for retirees. “But they shouldn't be able to take advantage of their clients.”
Obama's involvement underscores the opposition the government faces in revising 40-year-old rules that affect tens of millions of baby boomers nearing retirement and younger workers without pensions. Having beaten back previous efforts to update the rules, Wall Street now has more at stake. Banks have boosted their asset-management businesses after the 2008 financial crisis, while curtailing riskier and more capital- intensive trading units.
“There are some financial interests that are going to fight it with all they've got,” Obama said.
The president promoted the Labor Department proposal at the AARP event along with Sen. Elizabeth Warren (D-Mass.), whose popularity has surged among Democrats based on her claims that bankers and the financial industry too often try to take advantage of workers.
Officials declined to outline specifics of the plan to impose a standard known as a fiduciary duty on brokers, which will crack down on “backdoor payments and hidden fees,” according to a fact sheet issued by the White House.
The DOL's efforts to revise and expand the definition of fiduciary under the Employee Retirement Income Security Act have been in the works for several years, and the release of the rule (RIN 1210-AB32) has been pushed back several times.
The rule, which was proposed for the second time in March 2010, would implement a statutory prohibited transaction exemption under ERISA sections 408(b)(14) and 408(g) and under tax code Section 4975, outlining the requirements under which investment advice can be provided to plan participants and beneficiaries. It was withdrawn in September 2011.
Financial-industry groups say the Obama administration and the DOL have distorted the issue and disregarded existing tough rules for brokers. Those measures are enforced by the Securities and Exchange Commission and Financial Industry Regulatory Authority.
The Labor Department planned to send the proposal on Feb. 23 to the Office of Management and Budget for review, Labor Secretary Thomas E. Perez said on a Feb. 22 conference call with reporters.
It could take several months before the rule is publicly released, Perez said on the call, on which he was joined by Obama administration officials and John Bogle, the founder of mutual fund company Vanguard Group Inc. That step will allow the securities industry, investor groups and lawmakers to comment on the plan before the Labor Department can issue a final regulation.
At the heart of the proposal is an effort to tighten the legal standard for brokers handling retirement funds in individual retirement accounts and Section 401(k) plans, which now hold more than $11 trillion. Under current rules, brokers can sell any product that is “suitable” for an investor, meaning it fits the client's needs and tolerance for risk.
Brokers typically earn money from upfront sales commissions or fees paid by investors who purchase mutual funds. White House officials said that kind of compensation arrangement provides an incentive to recommend products that net higher fees or commissions without yielding better returns for investors. Clients lose as much as $17 billion a year from such conflicted advice, according to the Obama administration.
“The corrosive power of fine print, hidden fees and conflicted advice can eat away like a chronic illness at people's hard-earned retirement savings,” Perez said.
Investors are particularly vulnerable to conflicts of interest when moving investments from an employer-sponsored 401(k) plan to an IRA, the White House said. That process allows brokers to steer investors into products that earn them higher fees. The average IRA rollover for investors between 55 and 64 years old in 2012 was more than $100,000, according to Jason Furman, chairman of Obama's Council of Economic Advisers.
Former employees of companies such as AT&T Inc., Hewlett-Packard Co. and United Parcel Service Inc. have complained that brokers persuaded them to roll their 401(k) plans into high-cost, unsuitable IRA investments, according to a three-month Bloomberg News investigation published in June.
Subjecting brokers to a fiduciary duty, a standard that now applies to professional money managers, will lead to more lawsuits against the industry and add burdensome compliance requirements, industry groups argue.
The added costs will probably prompt brokers to drop client accounts with less than $50,000 of assets, leaving those investors to manage their own savings, according to the Securities Industry and Financial Markets Association.
“We have ongoing concerns that the DOL and the White House have completely ignored the existence of the robust regulatory regime under SEC and FINRA, and this re-proposal could make it harder to save for retirement by cutting access to affordable advice and limiting options for savers,” SIFMA Chief Executive Officer Kenneth Bentsen said in a statement. “The DOL re-proposal could ultimately raise the cost of saving and hurt all Americans trying to save for retirement, particularly middle-class workers.”
When the DOL issued a fiduciary-duty proposal in 2010, financial companies including JPMorgan Chase & Co. and Fidelity Investments said it was overly broad and would cover activities such as communications with call centers that process routine questions from investors. Morgan Stanley questioned whether selling investors bonds from a broker's inventory could have been prohibited by the earlier plan.
Congressional Republicans were also opposed, with the House approving legislation in 2013 that would have blocked the Labor Department from taking action.
Perez said the new rule will be “very different” from previous versions and would spell out practices, such as sales commissions and fee sharing, that would still be allowed.
“I'm confident we can actually do more to help the small and moderate savers in the context of the proposal we will be putting forth,” he said.
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©2015 Bloomberg L.P. All rights reserved. Used with permission.
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