Wall Street Gears Up as White House Pushes Retirement-Fund Rules

401K

A Fidelity Investments branch in New York.

Photograph: Victor J. Blue/Bloomberg

Top financial lobbyists converged on the White House last week in a failed bid to forestall an administration plan that would impose new rules on brokers who manage trillions of dollars in U.S. retirement accounts.

At issue is a Labor Department proposal to require brokers to act in their retirement clients’ best interest, a standard known as fiduciary duty.

On Jan. 23, five association heads -- among them two former governors and an ex-congressman -- gathered to tell presidential advisers Valerie Jarrett and Jeffrey Zients that the rules would throw the retirement system into chaos and harm savers with small balances, according to attendees and people briefed on the meeting.

The executives pledged to work with the administration and address its concerns that retirement savers are losing billions of dollars through high fees and questionable sales practices, these people said.

The Labor Department plans in the coming days to send the proposal for a final administration review, according to people familiar with the matter.

The rule is a lightning rod for what promises to be one of the biggest Wall Street lobbying efforts of the year, a fight over a business that impacts anyone with an Individual Retirement Account or 401(k) plan. The White House has signaled it will put its full heft behind the plan, and the battle is already growing nasty: an internal memo, described last week by Bloomberg News, highlighted what officials called brokers’ abusive trading and conflicts of interest.

‘Really Stunning’

“It’s really stunning that this is the view that the administration, at the very highest levels, has of an entire industry,” said Francis Creighton, the head of government affairs at the Financial Services Roundtable. His boss, former Minnesota Governor Tim Pawlenty, attended the White House meeting last week.

A White House official, reiterating comments made last week, said the administration has no update on the status of the Labor Department rulemaking.

Under current rules, brokers are held to a ‘suitability’ standard, meaning they must reasonably believe their recommendation is right for a customer. While the White House memo said the proposed fiduciary duty would help protect retirement savers, brokers have said it would substantially increase the costs of advising investors by adding extra paperwork and the risk of lawsuits.

The proposal, people familiar with the matter said, is about to go to the Office of Management and Budget for what could be a 90-day review. Once OMB signs off, it can be issued by the Labor Department. Then the public will be allowed to comment before a final regulation is completed.

That gives both sides most of this year to lobby.

The Labor Department has pressed to update the rules, which were issued in 1975. At that time, many workers had employer-controlled pensions and the 401(k) didn’t exist. Now, tens of millions of people invest for retirement through 401(k) plans and IRAs, which together hold more than $11 trillion.

Wall Street has spent more than four years lobbying against the Labor rule and successfully forced the department to withdraw its original proposal in 2011. They defeated another attempt to release a plan last August.

‘Political Battle’

“The Labor Department is in a big political battle,” said John C. Bogle, the founder and former chief executive officer of Vanguard Group Inc., who as a longtime advocate for small investors was one of the first people to push for the stepped up broker standard. “It is in deep politics, and that is a bad place to be.”

Still, Bogle said that he has talked to administration officials from time to time and is “very happy” about the progress thus far. “I feel like they are moving in the right direction,” he said.

Much of the finance industry has lined up to oppose the measure -- big banks with brokerages, mutual fund companies that thrive on clients who roll their 401(k) plans into IRAs, insurers selling annuities, and independent brokers and financial planners.

Leaders of the effort include Fidelity Investments, Morgan Stanley, Bank of America Corp., UBS AG and Ameriprise Financial Inc. They’re working together with the five finance trade groups that met with Jarrett, a senior adviser to the president, and Zients, head of the National Economic Council: The Financial Services Roundtable, the American Council of Life Insurers, the Securities Industry and Financial Markets Association, the Financial Services Institute and the Insured Retirement Institute.

‘Self-interested Salespeople’

A smaller lobbying effort is mobilizing in support of the Labor proposal. The collection of consumer groups, investor advocates and organized labor recently created a website, saveourretirement.com, to educate the public on the issue and encourage them to write to Congress and the White House backing the plan.

The site says that “thanks to loopholes in the rules that govern advice about retirement investing, banks, brokers, mutual fund companies and insurance agents are able to portray themselves as trusted advisers while acting as self-interested salespeople.”

While they don’t have the financial resources of the other side, the pro-fiduciary groups include large organizations like the AFL-CIO labor federation and the AARP -- associations that could unleash tens of millions of members. The advocates had their own White House meeting earlier this week.

Private Lobbying

Supporters of the Labor Department said they will be paying particular attention during the OMB review -- a time when the contents of the rule proposal won’t be public.

“Our experience has been that industry dramatically misrepresents the content and the impact of the rule, by making unsubstantiated claims” before it is released, said Marcus Stanley, policy director of Americans for Financial Reform, a coalition of groups that advocates for stronger regulation of Wall Street. “You are going to get a lot of fear-mongering.”

Tempers have been fraying already, especially after a White House draft economic analysis on the proposal became public last week.

The memo, from Council of Economic Advisers chief Jason Furman, argued that broker conflicts and practices like excessive trading to drum up commissions cost workers as much as $17 billion annually. All in all, investors lose five to 10 percent of their long-term savings due to conflicted advice, the memo said, adding that brokers “act opportunistically to the detriment of their clients.”

‘False Indictment’

Financial advisers took a dim view of the analysis.

Furman “is supposed to be the president’s chief economic adviser and he wrote something that wouldn’t pass an undergraduate economics exam,” said Creighton, of the Financial Services Roundtable. “They view the entire industry as conflicted and self-dealing,” he added. “It is a stunningly false indictment.”

Kenneth Bentsen, chief executive officer of Sifma who attended the White House meeting, agreed.

“If it goes the way of the Furman memorandum and impugns the integrity of an entire sector of the economy in order to push this rule on specious facts, I imagine this gets very public, very fast,” Bentsen said.

The groups opposing the rule have also been working with former Labor Department Solicitor Eugene Scalia. Now in private practice at the Gibson, Dunn & Crutcher law firm, Scalia has become well-known for suing the government to overturn financial regulations.

Scalia said the push by Labor Secretary Thomas Perez was unusual.

“Issuing this rule would be a surprising move by Secretary Perez, since historically Labor secretaries avoid controversy over retirement-related issues, and this one will be very contentious, including with a number of congressional Democrats,” Scalia said.

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