The Labor Department took the next step in the White House's plan to crack down on unnecessary retirement fees that cost Americans billions of dollars a year by issuing a proposed rule on conflicted investment advice Tuesday.
The rule requires anyone getting paid to provide retirement investment advice to act in the best interest of retirees. Currently brokers who oversee retirement savings accounts can get paid extra to steer their clients into unnecessarily expensive funds or excessively risky investments without disclosing that fact to their clients.
In February, the White House began its rollout of the new rule by releasing a report by the Council of Economic Advisers that estimated conflicted investment advice costs Americans saving for retirement $17 billion a year. Brokers' advice can be conflicted when they get paid by specific fund providers to promote funds that may not be suitable to certain investors, either because they are too risky or simply carry far higher fees than other comparable funds. In other instances, brokers are given incentives to refer clients to funds managed by their employer, even when better or cheaper options are available elsewhere.
The financial industry has opposed fiduciary standard rules in the past, saying it will raise costs and limit the advice investors can receive. That argument, however, ignores the financial incentives that can easily make seemingly cheap, non-fiduciary accounts very profitable for brokers and unnecessarily expensive for investors. Referencing the length of the proposed rule, the head of the securities industry's lobbying group, the Securities Industry and Financial Markets Association, said in a statement Tuesday that the group would need time to "thoroughly review the rule and its impact on investors" and would respond later during the comment period.
The proposed rule attempts to nullify anticipated objections by carving out significant exemptions. "Retirement advisers can be paid in various ways," Secretary of Labor Thomas Perez said in a press release, "as long as they are willing to put their customers’ best interest first." For instance, the rule allows brokers to receive otherwise prohibited payments if they are recommending the lowest cost option to their clients.
Even more significant is a clause the Labor Department refers to as the "best interest contract exemption." This exemption would allow brokers to continue to get paid for exactly the type of behavior that would otherwise be considered conflicted if they sign a contract saying they are acting as a fiduciary, and clearly explain the fees and costs to the client. That's a significant gap brokers may be able to use to turn fees from conflicted advice into fiduciary standard-approved revenue.
The Labor Department seems to be betting that transparency will shock investors into the right retirement investing decisions. And if brokers pledge to act in their clients' best interest but don't, there's always enforcement.