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September 25, 2014

Retirement Investment Advice Should Come Without Conflicts of Interest

  • Would you trust a food safety inspector who graded food based on how much the supplier paid the inspector, not on the safety or quality of the food?
  • Would you trust a doctor who was allowed to recommend drugs that didn’t work or that even caused harm simply because the pharmaceutical companies paid the doctor to prescribe them?
  • Would you trust a lawyer to represent you in a dispute if he or she was getting paid by the other side?

Of course you wouldn’t. No one would.

However, there are millions of professional financial advisers working today who are allowed to do essentially the same thing: They can recommend retirement investments that pay them handsome fees and commissions but drain their clients’ retirement savings with high costs, poor returns, and even substantial risks of loss.  That’s because those advisers have no “fiduciary duty” obligating them to act in the best interest of their clients.   Under this far-too-common scenario, millions of hardworking Americans can and do lose tens or even hundreds of thousands of dollars in retirement income.

At the heart of the problem is an outdated federal rule that permits salespeople who market themselves as trusted financial advisers to profit at their clients’ expense.  Forty years ago, during the presidency of Gerald Ford, the U.S. Department of Labor adopted the original fiduciary duty rule to help protect workers and retirees from conflicted financial advice. However, the rule was framed narrowly with some very large loopholes.  For example, it did not apply to one-time or occasional advice to a client, regardless of how much retirement money was at stake.  And it didn’t apply to distributions from a retirement plan, such as a rollover from a 401(k) to an IRA—just the time when a worker or retiree needs the best possible advice to help select new investment options.

These and other problems with the original rule are still on the books today, and they are causing vastly more harm to workers and retirees because of dramatic changes in the retirement landscape.  In fact, the retirement world today looks nothing like the one in 1975, when the rule went into effect. There were no 401(k)’s at all, and IRA’s had just come along (and the internet was still just a concept). Most retired Americans relied on an employer-run pension plan or social security to carry them through their golden years.  That, of course, is not the case anymore.  Today, most retirees are responsible for managing their own retirement savings through self-directed accounts like 401(k)’s and IRA’s.  And they face a huge variety of investment options, many of which are almost impossible to understand.  To afford a decent standard of living in retirement, they must have unbiased investment advice they can trust.

The Department of Labor, under the leadership of Secretary Thomas Perez and Assistant Secretary Phyllis Borzi, is poised to issue an updated and expanded rule that would require all those who provide investment advice about retirement assets to act solely in the best interest of their clients.  We hope and expect that the rule will include the provisions it needs to be effective: closing loopholes; covering the full spectrum of retirement vehicles in use today, especially IRAs; and making sure that the duty is a genuine best-interest requirement, not a weak substitute that depends simply on disclosure about conflicts of interest.

On September 17, 2014, a diverse group of public interest and labor organizations sent a letter to Congress and the Obama administration expressing strong support for the DOL’s anticipated rule. “Action by the DOL to update and strengthen the protections that apply when individuals receive advice about their retirement investments has the potential to deliver concrete benefits to millions of workers, investors, and retirees – all at no cost to the US treasury or taxpayers,” wrote the group, which, in addition to Better Markets, includes the AARP, AFL-CIO, AFSCME, Americans for Financial Reform, Consumer Federation of America, Pension Rights Center, among many others.  At the very least, argued the letter, the DOL rule should be released for comment as soon as possible so that all stakeholders on this critical issue can evaluate the merits of the proposal.

The Department of Labor is expected to send the proposed rule to the Office of Management and Budget in November for review.  A few months thereafter, it should be released for public comment.  Better Markets—and all the other groups that signed the letter—will be watching closely and pushing hard for a strong rule that provides real protection against the conflicted advice that threatens the secure retirement of millions of American workers and senior citizens.

No one would trust a lawyer whose arguments were being paid for by the opposing side, and no one would see a doctor who wasn’t obligated to act in their patients’ best interest. Financial professionals tasked with handling something as important as your retirement savings should be no different—and as soon as the Department of Labor updates and broadens its fiduciary duty rule, they won’t be.

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