President Obama is calling on the Department of Labor to crack down on the fees charged by brokers and financial advisers who consulting retirement savers.

The Labor Department on Monday will submit a proposed rule for approval from the Office of Management and Budget that would increase the standards for brokers who recommend investments for retirement accounts, requiring brokers to have the client’s best interests in mind. After approval, the proposed rule would be published and subject to public comments.

Under more stringent “fiduciary” standards, brokers would need to justify if they are recommending a security that is more expensive than other options available or that may be underperforming, retirement experts say. Current rules only require that the investment be “suitable,” which doesn’t place as much emphasis on cost and performance.

“You would need a reason for why you’re putting someone in the higher cost product,” says David Certner, legislative policy director at AARP.

The exact details of the rule won’t be available until the Labor Department’s announcement in a few months, but the changes are targeting Individual Retirement Accounts, which hold more than $7 trillion in savings for more than 40 million Americans.

An estimated $1.7 trillion of IRA assets are invested in products that provide payments that lead to conflicts of interest.
Weak consumer protections cost IRA investors up to $17 billion a year in excessive fees, according to research released Monday by the White House Council of Economic Advisers. Administration officials say the new rules would not eliminate commission payments.

“When you have a broker who has their compensation directly tied to the advice they’re giving to a person, they’re going to systematically have a big incentive to steer clients to investments that aren’t necessarily in their best interest,” said Jason Furman, chairman of the Council of Economic Advisers during a conference call with reporters.

There are three main conflicts that can exist when a person receives advice from a broker, according to a White House memo leaked to the news media last month. Some investors are encouraged to roll over assets from a 401(k) plan into an IRA, without receiving warning that the fees they incur in the new plan may be higher than what they were previously paying.

Some brokers receiving sales loads, or payments when investors buy a fund or security, may recommend that clients buy and sell those products more often than needed, causing them to pay those fees repeatedly and unnecessarily.

Other advisers attempt to justify their fees by recommending that clients use actively managed funds. But when those funds underperform low-cost index funds, investors are stuck with a double whammy of underperformance and higher investment costs.

The council estimates these conflicts reduce investment returns by 1 percentage point each year, which could reduce savings by more than a quarter over 35 years. Put another way, a $10,000 investment would normally grow to more than $38,000 over that time period, after adjusting for inflation, would instead be worth $27,500.

A typical worker who rolls over a 401(k) to an IRA at age 45 will lose an estimated 17 percent from her account by age 65. For someone with $100,000 in retirement savings, receiving conflicted advice could limit growth to $179,000 by age 65—a loss of $37,000 when compared to someone not receiving that conflicting advice.

“You could end up with tens of thousands of dollars less simply because your adviser isn’t required to put your best interests first,” said Jeff Zients, director of the White House National Economic Council.

Some investors may not be aware of the conflicting interests that could encourage their advisers to steer them into costly products or to make moves that could leave them with a loss. A 2013 survey of retirement savers by AARP found that about 50 percent of respondents were “less likely” to trust their plan providers after learning that advice they offer is not currently required to be in their best interest.

“Most of the general public has no idea that there are different kinds of advisers or different kinds of standards,” says Certner of the AARP. “Most of them assume that the advisers are working in their best interest.”

Once the Labor Department issues the proposed rules, investors will get a chance to submit comments in writing and in a public hearing. After reviewing the feedback, the Administration will decide what to include in a final rule, which will not go into effect immediately after it’s finalized.

Source: The Washington Post