Brokers Upended by Obama's Tough Rules for Retirement Advice

New U.S. Labor Department Rule Puts Retirees First
  • Labor Department requires firms to put client interests first
  • Rule softened from proposal after finance industry lobbying

U.S. brokers managing retirement accounts must adhere to tough new standards under an Obama administration rule released Wednesday that aims to protect millions of savers from conflicted investment advice.

The Labor Department regulation, which gave the industry some concessions from an earlier proposal, puts a capstone on President Barack Obama’s efforts to rein in Wall Street and level the playing field for investors who hold some $12 trillion in Individual Retirement Accounts and 401(k) plans. For the brokerages, mutual funds and insurers that fought the plan for more than five years, it will bring compliance headaches and likely more lawsuits from disgruntled clients.

The increased obligation for brokers, known as a fiduciary duty, requires them to put customers’ interests ahead of their own. The White House contends it will collectively add billions of dollars annually to retirees’ nest eggs by eliminating hidden incentives that cause brokers to push investment products with higher fees and commissions.

“Today’s rule ensures that putting clients first is no longer a marketing slogan,” Labor Secretary Thomas Perez said in a call with reporters. “It is the law.”

Potential Lawsuit

With a lawsuit challenging the rules almost inevitable, Perez and National Economic Council chief Jeff Zients stressed that the administration took into account “extensive feedback” from the industry, scaling back the proposal issued last year in numerous ways. That includes a final implementation date of January 2018, allowances for firms to recommend their own in-house products, making it easier to notify existing account holders of the new obligations and stipulating that brokers who provide educational information aren’t ensnared by the fiduciary obligation.

Companies such as LPL Financial Holdings Inc. and Primerica Inc. that manage money for individual investors rose in Wednesday trading after analysts said Labor’s final rule wasn’t as aggressive as expected. LPL surged as much as 13 percent to $26.35 and Primerica gained as much a 11 percent to $47.43.

Even with the Labor Department’s changes, financial firms have indicated they will continue fighting, both in federal court and Congress. Any litigation, some said, could focus on whether the Labor Department adequately followed rulemaking requirements such as properly weighing the regulation’s costs against its benefits.

The U.S. Chamber of Commerce will “consider every approach to address our concerns,” David Hirschmann, head of the business group’s Center for Capital Markets Competitiveness, said in a statement Tuesday.

The Labor plan is the first major overhaul of retirement savings rules since the 1970s. Back then, many workers had employer-controlled pensions and the 401(k) didn’t exist. Now, the bulk of Americans must make their own investing decisions as they contribute to IRAs and 401(k) plans.

Confused Investors

The update was necessary, the Obama administration said, to add protections for consumers who are often overwhelmed by a long list of investment choices and may have had no idea that their broker could profit by offering one mutual fund over another. Those conflicts were allowed under the current standard for brokers, one that calls for investments to be “suitable.”

The White House contends that the impact of biased advice is substantial. It laid out an example of typical worker with $100,000 in retirement savings who rolls her 401(k) into an IRA at age 45. Adjusted for inflation, the hypothetical worker’s investment would grow to an estimated $216,000 by age 65 if she received appropriate guidance. But it would increase to just $179,000 with conflicted advice, the administration said.

Industry groups, who dispute the White House’s calculations, say investors would be better served by the government stepping up its oversight of the small minority of dishonest brokers. Opponents also argue that the added regulatory burden will make it too expensive to keep handling investments for low-income people who have smaller account balances.

A large group of companies fought the rule, including Wall Street banks with brokerages, mutual fund companies that thrive on IRA rollovers and insurers that sell annuities. Thousands of independent brokers and financial planners also mustered opposition.

Industry Concessions

The Labor Department said its final rule responds to some industry objections. For instance, a new required contract that discloses conflicts can now be signed by a client when an account is opened. Firms complained that the proposal called for the contracts to be signed when a potential customer walked in the door.

The regulation will have the broadest impact on IRAs, as the number of 401(k) plans affected by it was shrunk in the final version.

Another tweak benefits brokers who recommend less-liquid holdings, such as real-estate investment trusts that aren’t publicly traded. The proposed rule could have prevented the sale of such assets.

Perez stressed that it is not Labor’s goal for brokers to put their customers in the cheapest products.

No Yugos

"The Yugo may be the lowest-priced car, but it ain’t a very good car," he said.

While it is not fully clear how financial firms will readjust their businesses, some have already moved to get in front of the policy. That is especially true of insurance companies, which sell types of annuities that have long been criticized by investor advocates for having steep commissions and high fees.

American International Group Inc. and MetLife Inc., for example, recently announced the sales of their brokerage arms. The fiduciary regulation was a “big factor” in AIG’s decision, CEO Peter Hancock said in January.

Others, consultants said, may be behind the curve. Surveys conducted by Deloitte show many companies were waiting to see what the final rule would demand before initiating any changes to their business practices, said Julia Kirby, a director of the firm’s regulatory advisory group.

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