By Arthur D. Postal
WASHINGTON – President Obama has given the Department of Labor the green light for the redraft of a rule to amend the definition of fiduciary under the Employee Retirement Income Security Act (ERISA), according to The White House.
However, the administration made clear the proposal will not outlaw payment of commissions to advisers for providing investment advice to owners of retirement accounts covered by ERISA. The president will say that the proposal “fulfills the DOL’s public commitment to ensure that all common forms of compensation, such as commissions and revenue sharing, are still permitted, whether paid by the client or the investment firm.”
The president will officially disclose his plans at an AARP event at 2 p.m. today, according to The White House.
Obama will say that he has directed DOL to move forward with its redraft "to protect families from bad retirement advice by requiring retirement advisers to abide by a 'fiduciary' standard — putting their clients’ best interest before their own profits," according to a copy of his prepared remarks.
"Middle class economics means that Americans should be able to retire with dignity after a lifetime of hard work," according to the document. "But today, the rules of the road do not ensure that financial advisers act in the best interest of their clients when they give retirement investment advice, and it’s hurting millions of working and middle class families.”
The president’s action will allow the DOL to send its re-draft to the Office of Management and Budget, which will then have 60 days to approve it for publication.
The president did not release the proposed rule he has authorized the DOL to send to OMB. However, he said it will do the following:
Require retirement advisers to put their client’s best interest first, by expanding the types of retirement investment advice subject to ERISA.
Preserve the ability of working and middle class families to choose different types of advice.
Preserve access to retirement education: The Department’s proposal will allow advisers to continue to provide general education on retirement saving across employer-sponsored plans and IRAs without triggering fiduciary duties.
The White House also officially released a report first provided by InsuranceNewsNet Jan. 23 that was prepared by the President’s Council of Economic Advisors and dated Jan. 13. InsuranceNewsNet noted in that story that the president could discuss the DOL’s plans in his State of the Union Address.
Today’s document cited those comments, “That’s what middle-class economics is — the idea that this country does best when everyone gets their fair shot, everyone does their fair share, and everyone plays by the same set of rules.”
The CEA report justifies a new standard by saying the following:
Conflicted advice leads to lower investment returns. Savers receiving conflicted advice earn returns roughly 1 percentage point lower each year (for example, conflicted advice reduces what would be a 6 percent return to a 5 percent return).
An estimated $1.7 trillion of IRA assets are invested in products that generally provide payments that generate conflicts of interest. Thus, we estimate the aggregate annual cost of conflicted advice is about $17 billion each year.
A retiree who receives conflicted advice when rolling over a 401(k) balance to an IRA at retirement will lose an estimated 12 percent of the value of his or her savings if drawn down over 30 years. If a retiree receiving conflicted advice takes withdrawals at the rate possible absent conflicted advice, his or her savings would run out more than 5 years earlier.
The average IRA rollover for individuals 55 to 64 in 2012 was more than $100,000; losing 12 percent from conflicted advice has the same effect on feasible future withdrawals as if $12,000 was lost in the transfer.
InsuranceNewsNet Washington Bureau Chief Arthur D. Postal has covered regulatory and legislative issues for more than 30 years. He can be reached at [email protected]
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