Published on March 7, 2015 in the Pawtucket Times
Last month, President Obama used his presidential bully pulpit to publicly support a proposed U.S. Department of Labor (DOL) rule, endorsed by a coalition of aging, labor and consumer groups, that reportedly limits conflicts of interest, increases accountability, and strengthens protection for Americans receiving retirement investment advice.
At the February 23 press conference held at the Washington, D.C.-based AARP headquarters, attended by Obama, Save Our Retirement Coalition members and lawmakers, the President called for the issuing of the proposed rule, still awaiting Office of Management and Budget (OMB) review and final DOL action. The updating of DOL rules and requirements would require higher standards for financial advisors, requiring them to act solely in their client’s best interest when giving financial advice, said Obama.
The Save Our Retirement Coalition says that the final rule is “needed to help protect Americans’ hard earned retirement savings from advisers who recommend investments based on their own interest – such as those that pay generous commissions – not because they serve their clients’ best interest.”
Existing Rules Outdated
In his remarks at AARP, Obama called the rules governing retirement investments written over 40 years ago “outdated,” filled with “legal loopholes,” and just “fine print,” needing an overhaul. The existing rules governing retirement investments were written “at a time when most workers with a retirement plan had traditional pensions, and IRAs were brand new, and 401ks didn’t even exist,” the President explained.
At the event, Secretary of Labor Thomas E. Perez., claimed that his agency has substantially reached out to “a wide range of stakeholders,” to craft the proposed rule that was sent to OMB. “The input we have received to date has been invaluable, but we’re not even close to being done. We have a lot more listening to do, and once the Notice of Proposed Rule Making is published in the coming months, I look forward to hearing from as many stakeholders as I can. We’re going to get this right, because the strength of the middle class depends on a secure retirement,” he says.
“We know the people we represent have worked hard to save for retirement, and we believe that they deserve to have financial advisers who work just as hard to protect what they’ve earned,” said AARP CEO Jo Ann Jenkins, in her remarks. AARP is a member of the Save Our Retirement Coalition.
“AARP, a major consumer advocate, has been fought for this consumer regulation for over five years to ensure that Americans of all ages get the best financial advice when planning for their retirement,” says Jenkins. “Recently AARP also found that 9 out of 10 employers who sponsor retirement savings plans support holding advice to such a ‘best interest’ standard,” she adds. .
“In today’s world, it’s hard enough to save for retirement and achieve your financial goals” added Jenkins. “We don’t need to make it more difficult by allowing some on Wall Street to take advantage of hard-working Americans. Bad financial advice is just wrong,” she says.
According to Save Our Retirement Coalition, “the need for the proposed rule was made starkly apparent in a White House report released showing that conflicts of interest are costing middle class families and billions of dollars annually. The 30 page report, released last month, details the current regulatory environment for financial planners, providing evidence on the negative financial impact of conflicted professional investment advice draining older American’s retirement saving accounts.
The White House report, issued by Council of Economic Advisors, cited evidence pulled from the literature, showing that “conflicted advice reduces investment returns by roughly 1 percentage point for savers receiving that advice” The report also found that “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. For those receiving conflicted advice “takes withdrawals at the rate possible absent conflicted advice, his or her savings would run out more than 5 years earlier.”
Holding Wall Street Accountable
“Many investment professionals do what’s right,” said AARP Rhode Island State Director Kathleen Connell. ”But loopholes in the law are allowing some on Wall Street to take advantage of hard-working Americans, recommending investments with higher fees, riskier investments, and lower returns to make even higher profits for themselves. Last year alone, hidden fees, unfair risk and bad investment advice robbed Americans of as much as $17 billion,” she states.
“AARP agrees that financial professionals of all types serve a valuable role in building the wealth and security of the investing public,” added Connell. “We simply want to achieve some consistency in the standards across the industry. Here is Rhode Island, many retirees are very concerned about their investment savings and they deserve protection. Our position is that retirement accounts managed by a broker should receive the same protections as regular investment accounts held with an advisor,” she says.
“Rhode Islanders have who have worked hard for their money and deserve a new standard that holds Wall Street genuinely accountable for helping them choose the best investments for themselves, their family and their future,” she adds.
Security Trade Group Concern
The Securities Industry and Financial Markets Association (SIFMA), a trade group representing securities firms, banks and asset management companies, is waiting to see the details of the proposed rule. SIFMA CEO Kenneth E. Bentsen, Jr., stated: “While we cannot comment on a proposal we have not yet seen, we have ongoing concerns that the DOL regulation could adversely affect retirement savers, particularly middle class workers. The new regulation could limit investor choice, cause inconsistencies as different regulators would apply different standards to the same regulatory accounts, prohibit guidance, and raise the costs of savings for retirement.”
But, both Obama and the Save Our Retirement Coalition strongly disagree with SIFMA’s assessment of the potential impact of DOL’s proposed rule, which has not yet been issued and is ultimately subject to change after the public comment period.
A large majority of financial planners put their clients first when giving them investment advice. But, as you know a few bad apples can truly spoil the barrel. If trade groups representing financial planners fail to act to rein in financial planners who give conflicted advice to pad their pockets, than federal regulations can quickly do that job by applying “simple, commonsense standards.”
It makes practical and political sense to me.
Here is a linked to President Obama’s comments at the AARP Press Conference: http://www.whitehouse.gov/photos-and-video/video/2015/02/23/president-obama-speaks-aarp.
Herb Weiss, LRI ’12 is a Pawtucket-based writer who covers aging, health care and medical issues. He can be reached at firstname.lastname@example.org . Or call 401/ 742-5372.