Asset Protection for American Retirement Savers
U.S. DEPARTMENT OF LABOR RULE WOULD ADD URGENTLY NEEDED PROTECTIONS FOR AMERICAN RETIREMENT SAVERS
Every year, retirement savers in the IRA market alone lose at least $17 billion in savings due to conflicted investment advice.
Today’s retirement market functions quite well for the broker-dealers, insurance companies, and mutual fund complexes that reap billions of dollars in profits for providing advice to investors about their tax-subsidized retirement accounts. It does not work nearly so well for American workers and retirees. That’s because outdated regulations allow retirement investment advisers to recommend second-rate investments that boost their compensation even if they burden savers with high fees and low returns. This is a business model that’s fueled by conflicted advice and it comes at the expense of the working families and retirees whose hard-earned retirement savings are being siphoned off to Wall Street.
To address this problem and close these legal loopholes, the U.S. Department of Labor (DOL) is undertaking a comprehensive rulemaking to provide new, common sense protections for retirement savers. This DOL rule would close the loopholes that currently allow Wall Street brokers and other financial advisers to put their own economic interests above the best interests of their clients saving for retirement.
Over the past two years, the DOL has gone to unprecedented lengths to give all stakeholders an opportunity to express their views on this proposal. After thoroughly studying the issue and considering all perspectives, the DOL issued a balanced proposed rule on April 14, 2015. It provides financial professionals with ample flexibility to serve their clients, while protecting retirement savers by minimizing advisors’ financial conflicts of interest when providing investment advice. Since April, the rulemaking has been the subject of a four-day public hearing, two comment periods lasting more than 150 days, and yet more public debate and stakeholder input. After gathering this unprecedented feedback on the proposal, the DOL is now working to finalize the rule.
A wide array of retirement experts, consumer advocates and industry professionals strongly support DOL’s efforts. But there is intense – and mounting – pressure from Wall Street to stop this crucial reform in its tracks. Given that brokerage firms, mutual fund complexes, and insurance companies stand to lose billions in excess profits if the rule goes through, it should come as no surprise that they are spending millions of dollars to kill it. The Koch brothers, the Tea Party, and their special interest allies are backing the industry’s efforts. Among their tactics, the industry is lobbying members of Congress and running propaganda ads claiming that the rule is going to harm low- and moderate-income families.
Most Democrats appear to see through the industry’s cynical ploy and fully understand that it is spending these vast sums out of pure self-interest, not out of genuine concern for low- and moderate-income families. However, some Democrats, particularly those who are especially cozy with the industry, are echoing industry talking points and seeking to delay, undermine, or stop the rulemaking.
THE FACTS ABOUT THE DOL’S PROPOSED RULE
Studies show that American workers and retirees lose billions of dollars in retirement income when they receive conflicted advice. A retirement saver who, based on conflicted advice, moves money out of a 401(k) plan and into an IRA can expect to lose an astounding 12 to 24 percent of the value of his or her savings over 30 years. These losses – the result of allowing financial advisers to place their own economic interests ahead of the interests of their customers — are so much more than numbers on a page; they have profound consequences for the financial security of hardworking Americans and their families.
Small savers will NOT lose access to advice and products. Self-interested industry opponents of the DOL rule claim it will force many financial professionals to stop serving “small savers,” who will either have to go without advice or be driven into more expensive fee accounts. In fact, there is no credible evidence that brokerage accounts are consistently more affordable than fee-based accounts when the total cost of investing is considered. And, many advisers already provide investment advice to small retirement savers under a best interest standard, and they will be happy to take on any clients abandoned by advisers who refuse to put their clients’ financial interests ahead of their own.
Congress should not intervene to delay, defund or undermine the DOL rule. Industry groups intent on derailing the DOL rule have turned to Congress. The House recently passed HR 1090, the deceptively titled “Retail Investor Protection Act,” which would effectively halt the DOL rule by tying it to action by the SEC. While that bill was approved on a largely party-line vote, some congressional Democrats have supported other efforts to weaken or delay the DOL rule. One group of House Democrats recently urged DOL to issue yet another proposed rule, followed by another comment period -a request regarded by most observers as a stalling tactic designed to kill the rule. Another small group of House members is asking members to sign on to a vague set of principles that they plan to incorporate into legislation to replace the DOL rule. But vague principles are no substitute for the binding best interest standard that DOL has proposed. Members of Congress should reject all measures that will delay, weaken, or interfere with this rulemaking; any such effort undermines the retirement security of hard-working Americans.
The problem with industry alternatives: they don’t provide real protection for retirement savers. Industry players have advanced several “alternative” proposals that purport to impose a best interest standard on financial professionals providing retirement investment advice. But none of these proposals protect investors in any meaningful way. As currently constructed, DOL’s proposed rule recognizes that a “best interest” standard, to be effective, must be backed by a real mitigation of financial conflicts of interest, must be enforceable, and must go far beyond mere disclosures, which are likely to produce more confusion than protection. The proposed rule is absolutely consistent with the reasonable expectations of retirement savers when they turn to financial professionals for advice. By contrast, the industry’s alternative “best interest” standard is in name only.
WHAT IS BEING SAID ABOUT THE RULE?
Arthur Levitt, longest serving chairman of the Securities and Exchange Commission: “People of modest means are the one who need this rule more than any other kind of investor, because the chances are that people who have modest means probably are less financially literate than people who have a great deal of money. The relationship between the individual handing transaction, whether you call him or her a broker or an adviser, is irrelevant. That person has a position of trust, and that trust is most important with people who don’t have financial literacy. That’s where you see the abuses occur; those are the very people that this rule is intended to protect.”
Michelle Singletary, nationally syndicated columnist and personal finance advisor: “This is the right thing to do. At stake are billions of dollars in retirement funds – $7.3 trillion invested in IRAs and more than $4 trillion in 401(k)s, according to Labor Department officials. The rules on the books now make for an uneven playing field for many of today’s investors, many of whom are overwhelmed by the options and could use some professional guidance. We need to ensure that people are getting the best advice possible to manage their savings, especially when it’s probably all they’ll have to lean on in retirement.”
Charles Ellis, former chairman of the Yale Endowment Investment Committee, and Scott Puritz, managing director of Rebalance-IRA, a technology-enhanced national investment service: “It’s time to hold all financial professionals accountable by consistently requiring them to act in the best interests of their clients. That’s what the DOL rule can do. Americans struggling to save for a dignified retirement should no longer be subjected to the conflicts of interest that are bleeding off their savings. And, if traditional brokerage firms can’t live with the simple fiduciary standard and refuse to serve modest savers, so be it. Other financial professionals on and off the Web who embrace the client-first approach stand ready to help all Americans prepare for a secure retirement.”
FOR MORE INFORMATION:
The full DOL proposed rule, public comments, and other information is available online at: http://www.dol.gov/ebsa/regs/conflictsofinterest.html
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