President Obama gave a full-throated endorsement of the Department of Labor's controversial proposal to impose fiduciary obligations on brokers and advisors working with retirement plans, insisting that new rules are a needed consumer protection to prevent billions in costs due to bad advice.
In remarks at the AARP on Monday, Obama stressed the importance of imposing a cohesive standard mandating that all brokers and advisors working in the retirement space act in their clients' best interests to guard against conflicted advice that could harm investors.
"The challenge we've got is right now there are no uniform rules of the road that require retirement advisors to act in the best interests of their clients, and that's hurting millions of working and middle-class families," Obama said in his address.
"There are a lot of very fine financial advisors out there, but there [are] also financial advisors who receive back-door payments or hidden fees for steering people into bad retirement investments that have high fees and low returns," he added. "So what happens is these payments, these inducements, incentivize the broker to make recommendations that generate the best returns for them, but not necessarily the best returns for you."
COST OF CONFLICTED ADVICE
The White House Council of Economic Advisers issued a report to coincide with Obama's remarks, pegging the cost of conflicted advice on middle-income families at $17 billion per year. The CEA estimates that conflicted advice cuts one percentage point off average annual returns for middle-class savers.
The Labor Department's proposal now heads to the White House Office of Management and Budget for a review that could take three months or longer. After that period, DoL will publish the draft as a notice of proposed rulemaking, and will hold a hearing on the issue and solicit comments from the public.
The Labor Department first proposed an expanded fiduciary definition under the Employee Retirement Income Security Act, or ERISA, in 2010, but withdrew the proposal the following year amid broad criticism that it would impose onerous restrictions on the industry that would cause financial professionals to abandon the retirement space, leaving low and moderate-income Americans in the lurch.
Those concerns have persisted in the intervening years as the department has been retooling its proposal, though Monday's announcement comes with the assurance that many common business practices in the brokerage industry will still be permitted.
'PRINCIPLES-BASED' EXEMPTION
At its core, the proposed rule would require covered retirement advisors to make recommendations and investment decisions that are in the best interest of clients. It would also create a new, "principles-based" exemption under ERISA that promises not to bar specific business models, as some industry groups have feared.
"To ensure that advisors can continue to serve a wide range of clients, the department does not plan to prohibit common compensation practices, such as commissions and revenue sharing, and intends to give firms the flexibility to figure out how to meet their clients' best interest," the Labor Department says on an
Indeed, in offering a preview of the proposed rule, the Labor Department took pains to emphasize what it will not cover. The department says that the regulation would not apply to employee stock ownership program valuations, and will "continue to allow financial advisors to provide general education on retirement saving."
INDUSTRY PUSHBACK
Nonetheless, as news emerged that the president would be speaking on the proposed fiduciary regulation, several industry trade groups issued statements expressing concern with the yet-be-published rules.
The National Association of Plan Advisors charged that the "White House launched an attack on advisors and so-called 'hidden fees' and 'backdoor payments' by moving forward with a regulation that has its own hidden backdoor effect -- keeping many Americans from working with the trusted advisor of their choice, even in the critical decision regarding rollovers from their 401(k) and 403(b) plans."
People should be protected from unfair and deceptive practices," NAPA Executive Director Brian Graff said in a statement. "But all indications are that this rule will block Americans from working with the financial advisors and investment providers they trust simply because they offer different financial products -- like annuities and mutual funds -- with different fees."
Two other industry trade groups that have lobbied against the fiduciary proposal -- SIFMA and FSI -- offer slightly more conciliatory statements, though both groups argue that existing regulations under the SEC and FINRA are already in place to guard against bad retirement advice.
Says SIFMA CEO Kenneth Bentsen: "The new regulation could limit investor choice, cause inconsistencies as different regulators would apply different standards to the same retirement accounts, prohibit access to investor guidance, and raise the costs of saving for retirement."
The Labor Department's proposal also has its share of critics on Capitol Hill, including Sen. Orrin Hatch (R-Utah), the new chairman of the Finance Committee, who argues that DoL is attempting to regulate outside its proper jurisdiction, and has authored legislation that would enshrine regulatory authority over the IRA sector within the Treasury Department.
"It is concerning the Administration is moving forward with this rule after little to no consultation with Congressional tax leaders," Hatch said in an emailed statement. "Because IRA's are tax preferred savings accounts and not employee benefit plans, any new fiduciary rules regarding IRAs should be drafted by the Treasury Department. After all, it is the Treasurys responsibly to enforce the tax code, not the Labor Department."
In the meantime, several advocacy groups were quick to hail the White House's endorsement of the retirement fiduciary rules.
The Financial Planning Coalition -- a collaborative effort of the CFP Board, the FPA and NAPFA -- heralded the advance of the rules, arguing that an update of the 1974 ERISA statute is long overdue. It noted the dramatic changes that have taken place in the retirement market as Americans have become increasingly dependent on 401(k) plans and IRAs to fund their post-working years.
"Given the significant changes to retirement saving since the passage of ERISA, it is entirely appropriate for the DOL to reevaluate the 40-year-old rule defining the fiduciary standard for those financial professionals providing investment advice to retirement savers," the FPC said in a statement. "Those who work hard and save for the future deserve financial professionals whose primary concern is the best interests of their clients and not their bottom line."
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