WASHINGTON — The Obama administration is proposing tougher restrictions on brokers who manage Americans’ retirement accounts, reigniting a confrontation with the financial services industry over rules affecting trillions of dollars in 401(k) and other savings accounts.
The change would put brokers — who sell stocks, bonds, annuities and other investments — under the stricter requirements for registered financial advisers when they handle clients’ retirement accounts. In a long-anticipated move, the Labor Department is making the proposal Monday to the White House Budget Office. After an internal review, it likely will be put out for public comment for several months.
The rule has been the subject of intense behind-the-scenes lobbying, pitting major Wall Street firms and financial industry groups against a coalition of labor, consumer groups and retiree advocates such as the AARP. The administration first proposed a regulation in 2010, but pulled it back following an industry outcry that the proposal would hurt rather than help investors by limiting choices.
Conflict of Interest
To buttress the new effort, the White House on Monday released a 30-page report from its Council of Economic Advisers noting that an estimated $1.7 trillion of individual retirement account assets are invested in products that pay fees or commissions that pose conflicts of interest.
“When you go to a doctor or a lawyer, you expect the advice you get to be in your best interests. But the same doesn’t always hold true in the world of retirement savings,” Labor Secretary Tom Perez said in a conference call with reporters. “Many financial advisers have taken an oath to serve your best interests, but there are other financial advisers and brokers who provide critical financial advice every day and are not obligated to look out for your best interests.”
Americans increasingly are seeking financial advice to help them navigate an array of options for retirement, college savings and more. Many people provide investment advice, but not all of them are required to disclose potential conflicts of interest.
Under current rules, brokers are required to recommend only “suitable” investments based on the client’s finances, age and how much risk is appropriate for him or her. The rules would make brokers handling retirement accounts obligated to put their clients’ interests first.
Industry Officials Dispute Studies
The chairman of Obama’s Council of Economic Advisers, Jason Furman, pointed to academic studies that conclude investors who receive investment recommendations potentially influenced by conflicts of interest sustain a 1 percentage point lower return on their retirement savings, totaling losses of $17 billion every year to middle-class families.
Industry officials dispute those studies and say the industry is well governed by financial regulators like the Securities and Exchange Commission. They say the Department of Labor is ill-suited to write rules best left to agencies more familiar with the financial industry.
“You have the Department of Labor, which really doesn’t know this area,” said Ira Hammerman, general counsel for the Securities Industry and Financial Markets Association, the brokerage industry’s big lobbying group. “Our concern is they are not going to get it right, just like they did not get it right in 2010.”
AFL-CIO President Richard Trumka said the proposed protections are overdue, noting that much of the current regulatory regime was set before 401ks and IRAs gained prominence as retirement savings vehicles. He predicted a difficult path to a final rule, however, given the financial industry’s opposition.
SEC Considers Further Regulations
Meanwhile, the SEC is studying the broader investment advice industry to determine whether it should come under further regulations. Critics of the Labor Department effort say the Obama administration should leave the regulations to the SEC or it will risk limiting the advice available to investors with relatively small retirement savings. “Investors benefit from choice; choice of products, and choice in advice providers,” SEC Commissioner Daniel Gallagher, a critic of the Labor Department proposal, said in a speech Friday. “This is something the nanny state has a hard time comprehending.”
Perez and Jeff Zients, director of the White House National Economic Council, said administration officials have been consulting with SEC Chairman Mary Jo White, financial industry officials and consumer groups. Zients said the proposed rule would be “very different” from the restrictions the administration proposed in 2010. “Much has been learned since then,” he said.