President Proposes Rule to Protect Worker Savings

 President Obama addressing fiduciary standards at AARP headquarters in Washington D.C.

President Barack Obama announces plans to create new rules to protect investors and their retirement savings. AARP Headquarters in Washington, D.C.

President Barack Obama called on the Department of Labor today to draw up a rule to protect people who save in IRAs, 401(k)s and other workplace retirement plans from hidden fees and expenses that may drain billions from their accounts.

The president wants brokers and other professionals to be required to act in an investor’s best interest — instead of their own — when dispensing advice on retirement accounts.

“Right now there are no uniform rules of the road that require retirement advisers to act in the best interest of their clients, and that’s hurting millions of working and middle-class families,” said Obama, during an announcement this afternoon at the Washington headquarters of AARP.

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“There are a lot of very fine financial advisers out there, but there are financial advisers who receive backdoor payments or hidden fees for steering people into bad retirement investments that have high fees and low returns…. They might even recommend investments with worse returns simply because they get paid to recommend those products,” he said. “The truth is, most people don’t even realize that is happening.”

A proposed rule by the Labor Department would dramatically alter 40-year-old regulations. Eliminating conflicts of interest by those giving retirement advice could prevent investors from losing as much as $17 billion a year that now goes to advisers and their firms in the form of “backdoor payments” and “hidden fees,” the White House said in a report released today.

AARP and other consumer advocacy groups, which for years have championed stronger investor protections, applauded the move.

“In today’s world it’s hard enough to save for retirement and achieve your financial goals. We don’t need to make it more difficult by allowing some in the financial industry to take advantage of hardworking Americans,” said AARP CEO Jo Ann Jenkins. “All advice should be in the best interest of the consumer. Bad  advice is just wrong — period.

“People deserve investment advice based on what’s truly best for them and their financial future. And AARP supports having investment professionals put consumers’ interests first — ahead of their own personal gain,” Jenkins said.

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The Labor Department is expected to submit the draft rule to the Office of Management and Budget today. The proposal later will be available to the public for comment.

The rules governing investment advice in retirement plans were established back in 1975 and haven’t changed much since. The retirement landscape, though, has dramatically shifted. Forty years ago, many workers were covered by a traditional pension that made the investing decisions for them. Now, the majority of retirement savings — more than $11 trillion — are held in IRAs and 401(k)s, where the investing burden often rests on the shoulders of the worker.

While the investment industry and consumer advocates agree that workers can benefit from financial education and advice, they part ways on how it’s delivered.

Currently, registered investment advisers must act in the best interest of their clients — a standard called  “fiduciary duty.” However, some brokers and other financial professionals advising on IRAs and workplace retirement plans need only make sure the investment is “suitable” based on, say, investors’ ages or how much risk they can handle.

And a suitable investment isn’t necessarily the best one for you — or the least expensive. For example, a broker choosing between two mutual funds to recommend to you might select the one that pays him or her a higher commission or generates more annual fees for the firm.

The typical saver could lose more than a quarter of his or her retirement savings over 35 years from conflicted advice, the president said.

According to a fact sheet released by the White House, the Labor Department’s proposal would require brokers and other professionals to act in workers’ and retirees’ best interest — although they could still earn sales commissions. Also, advisers won’t have to adhere to a fiduciary standard if they are only offering general financial education to workers and retirees with IRAs and workplace retirement accounts.

This isn’t the first time the Labor Department has tackled this issue. A similar proposal was made in 2010. After feedback from the industry and investor advocates, the agency withdrew its proposal to work on it some more.

A lot is at stake. Both investor advocates and representatives from the industry have been making their case in the court of public opinion lately.

AARP along with several other groups representing consumers and workers formed a coalition and companion website in January to urge the Labor Department to raise the standard for advice on retirement accounts. AARP has also created this action page where you can lend your voice to the debate.

Meanwhile, the investment industry warned that holding it to the higher standard could actually hurt workers and retirees.

“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,” Kenneth E. Bentsen Jr., president and CEO of the Securities Industry and Financial Markets Association, said in a statement.

The debate is far from over. Meanwhile, investors seeking professional advice with 401(k)s and IRAs need to know how their advisers are being compensated and if they have any conflicts of interest. And the best way to find out now is to ask.

Photo: Pete Marovich

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