President Barack Obama endorsed Monday the Department of Labor’s redraft of its rule to amend the definition of fiduciary under the Employee Retirement Income Security Act.
“Today, I’m calling on the Department of Labor to update the rules that advisors” use for retirement advice, so that advisors “put the best interest of their clients above their own,” Obama said in comments at AARP’s Washington headquarters. “If you want to give financial advice, you have to put your clients’ interest first.”
However, Obama said that “just because we put forth a new rule doesn’t mean that it will become law. Special interest groups will fight it with everything they’ve got.” That said, “we can actually look at the evidence, [and see that] the industry’s doomsday predictions have not taken place in other countries.”
Said Obama: “We are going to keep pushing for this rule.”
Obama said that those saving for retirement “should have the peace of mind knowing that the advice you’re getting is sound, that you’re not being taken advantage of.” However, as it stands now, “there are no uniform rules of the road to require retirement advisors to act in the best interest of their clients, and that’s hurting millions” of retirement savers.
While “there are a lot fine advisors” who are putting their clients’ interest first, Obama said, there are also those advisors who are receiving “backdoor payments” and charging high fees.
Obama cited statistics released the same day in the White House’s new report from his Council of Economic Advisers which show that conflicts likely lead, on average, to 1 percentage point lower annual returns on retirement savings as well as $17 billion of losses every year for working and middle-class families.
Secretary of Labor Thomas Perez stated at the AARP event that “when it comes to financial advice, conflicts of interests can lead to bad advice and hidden fees that too often keep us from getting investment advice that’s in our best interest.”
Said Perez: “This isn’t right, and we have an obligation to fix it. Consumers deserve to know that their advisor is working for them. Common-sense rules can protect investors and consumers, prevent abuse, and ensure that brokers and advisors provide advice that is in consumers’ best interests.”
The proposed rule DOL has sent to the Office of Management and Budget is the product of “substantial outreach to a wide range” of stakeholders, Perez said. But that move is just one step towards modernizing a nearly 40-year-old regulation, the fiduciary rule.”
The OMB must now review the rule — a process that could take three months or longer — and send it back to DOL to publish for public comment.
“The input we have received to date has been invaluable, but we’re not even close to being done,” Perez said. “We have a lot more listening to do.”
Once DOL’s Notice of Proposed Rulemaking is published in the coming months, Perez said that he looked “forward to hearing from as many stakeholders as I can.”
Both supporting and opposing statements flooded in after Obama’s endorsement.
Sen. Orrin Hatch, R-Utah, chairman of the Senate Finance Committee, said in a statement that “it is concerning the administration is moving forward with this rule after little to no consultation with congressional tax leaders. Because IRAs are tax-preferred savings accounts and not employee benefit plans, any new fiduciary rules regarding IRAs should be drafted by the Treasury Department. After all, it is the Treasury’s responsibility to enforce the tax code, not the Labor Department.”
Kenneth Bentsen Jr., president and CEO of the Securities Industry and Financial Markets Association, said that “while we cannot comment on a proposal we have not yet seen, we have ongoing concerns that the DOL regulation could adversely affect retirement savers, particularly middle-class workers.”
The new regulation, Bentsen said, “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.”
As the process moves forward, “OMB must consider all of the facts, including the fact that the brokerage industry is highly regulated” by the Securities and Exchange Commission and the Financial Industry Regulatory Authority, "including with respect to retirement accounts, and in particular, recent guidance by FINRA with respect to rollovers.”
Dale Brown, president and CEO of the Financial Services Institute, stated that on average, DOL rules are reviewed by OMB for “almost four months.” IRA owners, Brown said, “are already protected by robust federal and state rules governing the retirement market. Therefore, we are eager to study the reproposed rule and respond constructively.”
Brian Graff, CEO of the American Society of Pension Professionals and Actuaries, stated that the White House on Monday “launched an attack on advisors and so-called ‘hidden fees’ and ‘backdoor payments’ by moving forward with a regulation that has its own hidden backdoor effect — keeping many Americans from working with the trusted advisor of their choice, even in the critical decision regarding rollovers from their 401(k) and 403(b) plans.”
While “people should be protected from unfair and deceptive practices,” said Graff, who’s also executive director of the National Association of Plan Advisors, “all indications are that this rule will block Americans from working with the financial advisors and investment providers they trust simply because they offer different financial products — like annuities and mutual funds — with different fees. This rule could even restrict who can help you with your 401(k) rollover.”
Dennis Kelleher, president and CEO of Better Markets, applauded Obama endorsing DOL’s proposed rule. “By advancing this rule, the president is taking a huge step towards ensuring that tens of millions of Americans finally get unbiased advice, maximize their savings, and increase their chances for a comfortable and dignified retirement,” Kelleher said.
The Financial Planning Coalition — which includes the Certified Financial Planner Board of Standards, the Financial Planning Association and the National Association of Personal Financial Advisors — said in a statement that the White House’s support of DOL’s proposal “is a strong sign that investor protection is a priority for this Administration.”
Given the “significant changes to retirement saving since the passage of ERISA,” the Coalition said, “it is entirely appropriate for the DOL to reevaluate the 40 year-old-rule defining the fiduciary standard for those financial professionals providing investment advice to retirement savers,” adding that the Coalition urges OMB to complete its review of the rule “in a timely fashion.”
Said Barbara Roper, director of investor protection of the Consumer Federation of America: “By closing loopholes in the current regulations and subjecting all retirement investment advice to a fiduciary duty to act solely in the best interests of the client, a well-crafted DOL rule has the potential to save millions of Americans billions of dollars each year. Financial services firms would still be able to adopt a variety of business models and make a reasonable profit, but not by preying on the lack of sophistication of the average worker or retiree who relies on them for best-interest recommendations.”
Kent Mason, a partner with Davis & Harman in Washington, a law firm serving banks and large corporations, says that while the administration’s goal “is to require advisors to act in the best interest of their customers, the industry has no concerns with such a requirement, as evidenced by the industry’s longstanding support” for an SEC best-interest standard.
The “key issue,” Mason says, “is whether the Department of Labor reproposal will, like the original proposal, render illegal the means by which low- and middle-income individuals and small businesses receive their investment assistance. Given the lack of coordination with the industry on this very difficult issue, serious concerns will remain until the reproposal is made public.”