The Obama administration is proposing tougher regulations on investment brokers that officials said would curb hidden fees and conflicts of interest that cut into Americans' retirement savings.
The proposed rule changes — the subject of intense behind-the-scenes fights between financial services firms and reform groups — are broadly expected to force investment professionals to put clients' interests ahead of their own in giving advice on a variety of transactions involving retirement accounts.
Here's a quick question-and-answer on what it's all about:
Isn't the rule now to put clients' interests first?
Under the current standards, investment advisors in many cases are required only to ensure that investments are "suitable" for their clients, a lower standard that doesn't preclude advisors from making recommendations that may allow them to steer clients to higher-cost or lower-return investments that may pay the advisor more in commissions.
What's the new rule?
The new rule would turn advisors on a range of new transactions into fiduciaries, making them liable to Labor Department enforcement action if they are found to have put their interests ahead of their clients in, for instance, handling rollovers of 401(k) plans to individual retirement accounts.
Why would anyone be against that?
The financial services industry, which has fought the rule change vigorously in Congress and before the Labor Department, argued that it would restrict access to investment advice to those who need it most, lower- and middle-income workers and retirees.
The industry fears that the new rules will prohibit transactions in which an advisor takes a commission or other payment from a mutual fund company or other investment provider. Such a scenario, the industry argued, would require individuals to pay upfront for investment advice, sharply limiting the number of people who could get it.
Is that true?
Proponents said the new rules will allow commissions but simply require that advisors be held to a higher standard when making recommendations.
Why don't we know for sure?
Because the final wording of the proposed rule changes isn't expected for a few more months. A lot hinges on how it is worded and what exceptions are allowed under the new rules.
Is the administration concerned about a particular segment of the market?
The new rules are expected to target the market for rolling over 401(k)s, which generally have lower fees, into IRAs, which offer a wider range of investment options, including annuities, and usually include higher fees.
Are fees important?
Very. High fees drag down returns, which means less money to spend in retirement. The administration said a retiree who receives "conflicted advice" in a rollover will lose about 12% of the value of the savings if drawn down over 30 years. Overall, the administration said, conflicted advice costs investors about $17 billion a year.
What's the big picture?
Over the last generation, most workers' pensions have shifted from so-called defined benefit plans managed by professional investors to 401(k)s and IRAs that call on individuals themselves to make investment decisions.