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'Obamacare for Retirement Planning'? Inside the New Fiduciary Rule

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WASHINGTON – A new federal regulation requiring financial advisors to act in the best interests of their clients rather than their own bottom line has drawn mixed reviews, with proponents asserting the move will protect retiree savings while investment interests insist some money managers will stop accepting modest patrons as unprofitable.

The provision promulgated by the Department of Labor, known as the fiduciary rule, was issued to address potential conflicts of interest related to retirement advice. The agency maintains the move will save middle-class families billions of dollars every year.

“With the finalization of this rule, we are putting in place a fundamental protection into the American retirement landscape,” Secretary of Labor Thomas Perez said. “A consumer’s best interest must now come before an advisor’s financial interest. This is a huge win for the middle class.”

An estimated 9 million households could be affected by the rule.

President Obama called on the department in February 2015 to develop a new rule requiring retirement advisers to abide by a fiduciary standard placing their clients’ best interest before their own profits.

“It’s a very simple principle,” Obama said. “You want to give financial advice, you’ve got to put your client’s interests first.”

But some critics, like Sen. Johnny Isakson (R-Ga.), chairman of the Senate Subcommittee on Employment and Workplace Safety, claim the new rule will have the opposite effect, making it harder and more expensive for individuals and small businesses to receive financial advice.

“This fiduciary rule will harm countless Georgians who have worked hard to make sure they make wise financial decisions for their families’ futures,” Isakson said. “For families across the country, this rule is essentially the Obamacare for retirement planning, and I will do everything I can to overturn this rule.”

Isakson already has offered legislation prohibiting the Department of Labor from issuing a rule until the Securities and Exchange Commission has issued its own final rule relating to standards of conduct for brokers and dealers. That legislation is pending.

Beginning in 1974, with the passage of the Employee Retirement Income Security Act (ERISA), DOL assumed responsibility for protecting tax-preferred retirement savings. The retirement savings marketplace has experienced a dramatic shift since ERISA, moving from employer-sponsored defined benefit plans to participant-directed 401(k) plans. But regulatory protections have failed to keep pace — 401(k) plans did not exist and IRAs had just been authorized when the law passed but the rules have not been meaningfully changed since 1975.

DOL notes that changes in the retirement landscape have increased the importance of sound investment advice for workers and their families. While many advisers do act in their customers’ best interest, the agency maintained, not everyone is legally obligated to do so.

To this point, “many investment professionals, consultants, brokers, insurance agents and other advisers operate within compensation structures that are misaligned with their customers’ interests and often create strong incentives to steer customers into particular investment products,” the department said in announcing the new regulation. “These conflicts of interest do not always have to be disclosed and advisers have limited liability under federal pension law for any harms resulting from the advice they provide to plan sponsors and retirement investors. These harms include the loss of billions of dollars a year for retirement investors in the form of eroded plan and IRA investment results, often after rollovers out of ERISA-protected plans and into IRAs.”

The fiduciary rule is aimed at protecting investors by requiring all who provide retirement investment advice to plans and IRAs to place their clients’ best interest before their own profits.

“This final rulemaking fulfills the Department’s mission to protect, educate, and empower retirement investors as they face important choices in saving for retirement in their IRAs and employee benefit plans,” DOL said.

The move delighted some critics of the financial services community.

“Most retirement advisers do what’s in their clients’ best interests, but not all of them,” said Sen. Elizabeth Warren (D-Mass.), who sits on the Senate Banking, Housing & Urban Affairs Committee. “Loopholes have made it perfectly legal for retirement advisers to take big kickbacks — fancy vacations, luxury cars, even Super Bowl-style rings — for selling lousy products.”

The new rule, Warren said, will ensure that “all retirement advisers, not just some of them, are required to put their clients first.”

But David Hirschmann, president and CEO of the Center for Capital Markets Competitiveness with the U.S. Chamber of Commerce, said the regulation is “unworkable,” adding that it potentially “disadvantages small businesses, limits access and choice to investment advice, or makes saving for retirement more expensive.”

“For many workers, the only access to financial education is through an employer-provided retirement plan, and we will closely analyze any restrictions on an employer’s ability to provide education to employees in this area,” said Randy Johnson, senior vice president for Labor, Immigration, and Employee Benefits at the Chamber. “We have worked over the years to give the administration constructive feedback on this rule, and are concerned about whether it has sufficiently changed its previous direction. We need more Americans saving for retirement, not less, and we will be closely looking at the final rule to determine the severity of its unintended consequences.”

The Chamber claims financial advisers to the nation’s small businesses will stop servicing their clients because of increasing complexity, costs and liability under the new fiduciary rule, meaning affordable financial advice will prove harder to come by. Small-business owners and their employees could lose access to various retirement savings options and costs will increase because of the rule’s complexity.

Chamber officials indicated the organization is contemplating a lawsuit to halt implementation of the new rule but stopped short of declaring that intention.

In addition to the conflict of interest provision, the new rule defines a fiduciary as anyone being paid for making investment recommendations directed toward a particular plan. It further clarifies what does and does not constitute fiduciary advice.