White House Sets Sights On New Rules For Retirement Advice

February 23, 2015
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by Jason M. Breslow Digital Editor

President Barack Obama speaks at AARP in Washington, Monday, Feb. 23, 2015. President Barack Obama says too few Americans approaching retirement have saved enough to have peace of mind during their later years. (AP Photo/Jacquelyn Martin)

The Obama administration is returning to a debate with Wall Street over the rules that govern retirement advisors, arguing that current guidelines allow for conflicts of interest that cost investors at least $17 billion each year.

At issue is the legal standard that brokers and registered investment advisors use when handling money for clients who have an individual retirement account (IRA) or a 401(k). Under current law, financial advisors must provide advice that is at least “suitable” for a client, meaning it technically meets the client’s needs or tolerance for risk, but legally doesn’t have to be in their best interest.

The problem — as FRONTLINE reported in the 2013 investigation, The Retirement Gamble — is that financial advisors can legally recommend investment options that earn them commissions while saddling clients with an array of hidden fees.

At an address to the AARP in Washington on Monday, President Barack Obama endorsed a Labor Department plan that would force advisors to put their clients’ interest ahead of their own.

“You should have the peace of mind that the advice you’re getting is sound, that your investments are being protected,” Obama said. “If your business model rests on bilking hard-working Americans out of their retirement money, then you shouldn’t be in business.”

The White House did not outline specific details about the proposal — the plan will first be sent to the Office of Management and Budget for review and then opened to lawmakers, investor groups and the securities industry for comment. It will likely be several months before the Labor Department issues its final rule on how it will impose the higher “fiduciary standard” for financial advisors.

One of the administration’s concerns is that the payment structure of banks’ asset management businesses too easily incentivizes brokers to steer retirees towards investments with high fees or upfront sales commissions. In a report released ahead of his address, the president’s Council of Economic Advisors pointed to the example of IRA rollovers, which it argued could rob a typical investor of as much as much as $12,000 in retirement savings.

Another potential target of the initiative are loopholes in existing law that, according to investor advocates, allow brokers to get around their fiduciary obligations. For example, under current law, a financial advisor does not have to operate under the fiduciary standard if he or she is only offering a client advice on a one-time basis.

The securities industry is already pushing back. In a statement on Monday, the Securities Industry and Financial Markets Association, or SIFMA, the industry’s main lobbying group, warned that changes to the law would “adversely affect retirement savers, particularly middle class workers.”

“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,” SIFMA said.

This is the second time in five years that the Obama administration has sought to tighten the rules around financial advisors. In 2010, as FRONTLINE reported in The Retirement Gamble, the Labor Department tried to overhaul the 40-year-old law that deals with retirement advice — a law that took effect before the creation of the 401(k). But it withdrew the proposal the following year after heavy pushback from the financial services industry.

Watch how that effort was defeated in the below scene from the film:

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