White Houses directs EBSA to propose rule imposing fiduciary standard on brokers

President Barack Obama has directed the Employee Benefits Security Administration (EBSA) on February 23, 2015, to advance a proposal that would raise investment advice standards for brokers who handle retirement accounts. According to a Fact Sheet issued by the White House, EBSA would propose a rule requiring more brokers to abide by a fiduciary standard, putting the best interests of their clients ahead of their own when they provide retirement savings advice.
So-called backdoor payments and hidden fees cost middle class families and individuals billions of dollars every year, according to the Fact Sheet. On average, they result in annual losses of 1 percentage point for affected investors, which could reduce retirement savings by more than 25 percent over 35 years so that a $10,000 retirement investment would grow to just over $27,500 over that period, instead of more than $38,000, after adjusting for inflation.

According to the White House Fact sheet, EBSA is directed to propose a new regulation that will seek to:

  • Require retirement advisers to put their client’s best interest first, by expanding the types of retirement investment advice subject to ERISA: Despite the dramatic shift away from defined benefit retirement plans into self-directed IRAs and 401(k) plans, the definition of retirement investment advice has not been meaningfully changed since 1975, said the Fact Sheet. The EBSA proposal will update the definition to better match the needs of today’s working and middle class families to receive quality investment advice, without fear that financial bias is clouding a broker’s judgment.
  • Preserve the ability of working and middle class families to choose different types of advice: EBSA’s proposal would continue to allow private firms to set their own compensation practices by proposing a new type of exemption from limits on payments creating conflicts of interest that is more principles-based. This exemption will provide businesses with the flexibility to adopt practices that work for them and adapt those practices to changes not yet anticipated, while ensuring that they put their client’s best interest first and disclose any conflicts that may prevent them from doing so. This fulfills EBSA’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.
  • Preserve access to retirement education: EBSA’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 proposed rules would seek to crack down on irresponsible behavior in today’s market for financial advice by better aligning the rules between employer-based retirement savings plans and IRAs.

Next steps

The White House Fact Sheet provides a timetable for next steps, indicating that “in the coming months,” EBSA will issue a notice of proposed rulemaking and seek public comments on the “best approach to modernize the rules on retirement advice and set new standards, while minimizing any potential disruption to good practices in the marketplace.” The White House indicates that there will be opportunities to submit written comments as well as a public hearing. Further, once EBSA ultimately issues a final rule, it will not go into effect immediately.

Source: White House Fact Sheet, February 23, 2015.

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