President Obama on Monday started a new effort to crack down on conflicts of interest among retirement advisers, which he said offend “our basic values of honesty and fair play.”
In an appearance at the seniors organization AARP in Washington, Obama lent his vocal support to a forthcoming administrative rule that would aim to limit conflicts of interest in retirement investing, decrying the current lack of uniform “rules of the road” for advisers and warning that some are “receiving backdoor payments or hidden fees” to steer clients into higher-cost funds.
“You should have the peace of mind that the advice you’re getting for investing those dollars is sound,” the president said, casting the new rule as part of his broader “middle-class economics” agenda.
The problem, according to a report released by Obama’s Council of Economic Advisers on Monday morning, is that some brokers direct workers’ retirement savings into funds with high fees that don’t perform better and may perform worse than low-cost plans to receive fees, commissions or other compensation from those funds’ managers.
Obama’s economic advisers say that by steering savers into higher-cost plans for kickbacks, brokers can reduce savers’ returns by roughly 1 percentage point each year.
With $1.7 trillion of $7.2 trillion in individual retirement account assets invested in funds whose advisers have potential conflicts of interest, kickbacks effectively cost savers about $17 billion each year, according to the White House economists.
For individual savers, the effects over time can be large. The report found that a typical worker rolling over a 401(k) account into an IRA account at age 45 could lose an estimated 17 percent in investment gains by age 65 if his retirement account broker steered him into a higher-cost fund. With $100,000 in initial savings, that could be the difference between $216,000 or $179,000.
The Department of Labor will crack down with a new rule pertaining to the definition of retirement advisers to be proposed “in the coming months,” according to the White House.
The Labor rule will require all retirement advisers to conduct themselves according to a “fiduciary” standard, meaning that they must put their client’s financial interest before their profits. Currently, the standard for some retirement account brokers is that their advice be “suitable” for clients.
Labor Secretary Thomas Perez said Monday that the current definition was implemented 40 years ago in the Employee Retirement Income Security Act that created some of the tax-advantaged savings plans used today. Then, Perez noted, most workers did not have to worry about the investment advice they were receiving because pensions were the normal retirement-planning vehicle. Retirement savings have since shifted to defined-contribution plans such as 401(k)s and IRAs.
“The American Dream doesn’t end when someone retires,” Perez told the AARP audience. “A financially secure retirement is a fundamental part of the dream.”
Sen. Elizabeth Warren, D-Mass., praised the Obama administration’s move at the event Monday, saying “it’s about time to do something we should have done a long time ago.” Warren accused some investment advisers of giving clients improper advice in return for kickbacks including vacations and cars.
The administration has support from liberals such as Warren, but faces opposition from the industry.
Securities Industry and Financial Markets Association President and CEO Kenneth E. Bentsen Jr. warned Monday that the planned rule ultimately could hurt savers by deterring some advisers. “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,” said Bentsen, whose organization represents the financial industry.
Furthermore, some regulators believe that the Labor Department is intruding into an area already overseen by financial regulators.
Daniel Gallagher, a Republican-nominated commissioner for the Securities and Exchange Commission that oversees financial markets, said last week that investment advisers are already overseen by his agency.
“The White House memo is thinly veiled propaganda designed to generate support for a widely unpopular rulemaking,” Gallagher said at a commission event.
Nevertheless, rhetoric ran hot against the industry Monday. Sen. Cory Booker, D-N.J., said at the AARP event that conflicts of interest represent a “cancer on retirement savings.”
Obama also took a shot at industry complaints. “If your business model rests on bilking hard-working Americans out of their retirement money, then you shouldn’t be in business,” he said.
