WASHINGTON — President Obama called Monday for the Department of Labor to crack down on the “back-door payments” and “hidden fees” paid to brokers giving retirement advice.
The president endorsed a new rule proposed by the Labor Department that would increase the standards for brokers who recommend investments for retirement accounts, requiring brokers to have the client’s best interests in mind.
Under the more stringent standards, brokers would need to justify if they are recommending a security that is more expensive than other options available or that may be underperforming, retirement experts say. Current rules only require that the investment be “suitable,” which doesn’t place as much emphasis on cost and performance.
The president endorsed the tighter standards at a media event at AARP, stressing that excessive fees hurt middle-class families that are trying to improve their long-term security by saving for retirement. “You should have the peace of mind of knowing that the advice you’re getting for investing those dollars is sound,” he said.
The proposed rule is expected to be published in several months, after receiving approval from the White House’s Office of Management and Budget. It would then be published and subject to public comments.
The exact details of the proposed rules won’t be available until the Labor Department’s announcement in a few months, but the changes are targeting Individual Retirement Accounts, which hold more than $7 trillion in savings for more than 40 million Americans.
An estimated $1.7 trillion of IRA assets are invested in products that provide payments that lead to conflicts of interest, according to research released Monday by the White House Council of Economic Advisers.
Weak consumer protections cost IRA investors up to $17 billion a year in excessive fees, the report said. Administration officials say the new rules would not eliminate commission payments.
“Numerous studies have found that some advisers consistently steer customers to high-fee products despite the fact that high-fee products don’t perform any better,” Sen. Elizabeth Warren, D-Mass., said during the AARP event.
The new rules are expected to generate strong resistance from financial institutions, which argue that the added restrictions could make it more difficult for savers to get potentially useful advice. “This re-proposal could make it harder to save for retirement by cutting access to affordable advice and limiting options for savers,” said Kenneth E. Bentsen, president of the Securities Industry and Financial Markets Association.
Brian Graff, executive director of the National Association of Plan Advisers, said the new rules may force savers to end longstanding relationships with advisers. The change could make it harder for savers to roll their savings into an IRA, where they may benefit from having more investment options than they do in a 401(k) plan, even if some of those options are more expensive, he says.
The Labor Department tried to adjust the standards for retirement advisers in 2010 but withdrew the proposal after receiving strong resistance from the financial industry.
There are three main conflicts that can exist when a person receives advice from a broker, according to a White House memo leaked to the news media last month. Some investors are encouraged to roll over assets from a 401(k) plan into an IRA, without receiving warning that the fees they incur in the new plan may be higher than what they were previously paying.
Some brokers receiving payments when investors buy a certain fund or security may recommend that clients buy and sell those products more often than needed, causing them to pay those fees repeatedly and unnecessarily.
Other advisers attempt to justify their fees by recommending that clients use actively managed funds. But when those funds underperform low-cost index funds, investors are stuck with a double whammy of lower returns and higher investment costs.
The council estimates these conflicts reduce investment returns by 1 percentage point each year, which could reduce savings by more than a quarter over 35 years. Put another way, a $10,000 investment would normally grow to more than $38,000 over that time period, after adjusting for inflation, would instead be worth $27,500.
A typical worker who rolls over a 401(k) to an IRA at age 45 will lose an estimated 17 percent from the account by age 65. For someone with $100,000 in retirement savings, receiving conflicted advice could limit growth to $179,000 by age 65 – a loss of $37,000 when compared with someone not receiving that conflicting advice.
“You could end up with tens of thousands of dollars less simply because your adviser isn’t required to put your best interests first,” said Jeff Zients, director of the White House National Economic Council.
Some investors may not be aware of the conflicting interests that could encourage their advisers to steer them into costly products or to make moves that could leave them with a loss. A 2013 survey of retirement savers by AARP found that about 50 percent of respondents were “less likely” to trust their plan providers after learning that advice they offer is not currently required to be in their best interest.
“Most of the general public has no idea that there are different kinds of advisers or different kinds of standards,” said David Certner, legislative policy director for the AARP. “Most of them assume that the advisers are working in their best interest.”
Once the Labor Department issues the proposed rules, investors will get a chance to submit comments in writing and at a public hearing. After reviewing the feedback, the administration will decide what to include in a final rule, which would not go into effect immediately after it’s finalized.
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