According to an alarming report in the Wall Street Journal, government regulators at the Labor Department will be implementing new rules at the end of the year that will eventually force private retirement investments into government accounts. How? Some retirement plan advisers who offer employee benefits already act as fiduciaries, as do CFP professionals when offering financial planning advice. “I am fearful that those concerns, which were widely and bipartisanly held, will prove to be true once the rule becomes effective”. After more than a year of study, the White House on Wednesday finalized tougher requirements for retirement investment advisers. Currently, Americans saved up $7.3 trillion in Individual Retirement Accounts (IRAs) and $6.7 trillion in 401(k)s, which they can convert into IRAs. The revisions also could have a broader impact by promoting more disclosure throughout the financial industry – in other words, greater transparency in a business known for being impenetrable. Those economists had studied the rules involving 401(k) accounts and IRAs, and concluded advisers’ conflicts of interest were resulting in collective annual losses of about $17 billion for consumers.
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The administrative rule is being enacted without Congress. Critics fear it too broadly defines a fiduciary as anyone earning income by giving advice on individual retirement accounts or 401(k) retirement savings. Previously brokers were only required to recommend suitable investments, and some firms steered clients into investment products with unnecessarily high costs.
“This is a huge win for the middle class”, said Thomas Perez, secretary of the Labor Department, speaking of the so-called “fiduciary rule”, which has been in the works since 2010. They could promote products that paid them higher commissions, instead of identical products with lower commissions.
The new regulations, which may be challenged in court, were proposed a year ago by the department – which oversees pensions and retirement accounts – and were modified after hearings and industry criticism.
Firms are allowed to sell insurance products like variableand indexed annuities under the best interest rule.
Financial advisors, now “fiduciaries”, will have to sign contracts with clients at their first appointments, committing to working in their best interests. They will have to make “prudent” investment recommendations, according to the DOL, that don’t take their own interests into account, as well as charge reasonable compensation that doesn’t create a conflict of interest and fairly represent their recommended investments. The original plan called for an eight-month implementation period, though in a key concession by the Obama administration, firms will not have to be fully compliant until January 1, 2018.
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“It’s pretty obvious if people are expecting financial advice they should be able to count on the fact that it’s going to be real advice to help improve your situation”, says Bill Harris, the CEO of Personal Capital and former CEO of PayPal. The fiduciary rule may seem like a small, esoteric change, but it will make investment saving easier for millions of Americans. Similarly, the firms may have to transform the way advisers are compensated and put in additional resources to adapt to the new rule.
