Editorial

Agency should adopt rule to protect those with IRAs

Proposed Labor Department rule would extend protections for consumers' IRAs

The U.S. Supreme Court struck a blow for investors last week when it revived a lawsuit accusing the managers of a company retirement plan of picking investments that were too costly. Meanwhile, the Department of Labor is trying to provide a similar level of protection for individuals saving for retirement through IRAs and small group plans. Wall Street firms and investment brokers are fighting the department's proposal, arguing that they're already regulated enough. But it's not a persuasive argument.

The Employee Retirement Income Security Act of 1974 gives the Labor Department jurisdiction over pensions, 401(k) plans and individual retirement accounts, but the standards for consumer protection aren't the same across the board. Managers of corporate pensions and 401(k) plans have a "fiduciary duty" to the employees, which means (among other things) that they have to pick investments or offer options that are in the employees' best interests. And as the Supreme Court ruled May 18 in Tibble vs. Edison International that means not continuing to offer workers higher-cost mutual funds when there are identical but lower-cost versions available.

Professional investment advisors are bound by the same fiduciary duty. But many of the people who help consumers choose what investments to put in their IRAs — in particular, the broker/dealers who are paid through commissions or fees built into the funds they're peddling — are not, at least not in a formal way. According to the Department of Labor, those people fall under a different standard: that the investments they recommend be "suitable." Consumer advocates say that standard doesn't stop brokers from selling a higher-priced version of a fund because it's more profitable for them, even though it delivers a lower return to customers. By the White House Council of Economic Advisors' estimate, such conflicts of interest reduce Americans' IRA earnings by about 1% a year, or $17 billion.

The Labor Department's proposed rule which is still a work in progress, would extend the fiduciary standard to anyone paid to help individual consumers make investment decisions about their IRAs. They can continue to earn commissions from mutual funds, or other potentially conflicting forms of payment, as long as they're contractually bound to disclose those conflicts and act in their customers' best interests.

Opponents of the rule say the department should wait for the Securities and Exchange Commission to adopt a long-awaited rule that would clarify broker/dealers' duties toward all investors, not just those saving for retirement. But that train may never reach the station. Besides, the 1974 law gives the department the job of protecting employees' retirement savings. Considering that more than $7 trillion has been invested in IRAs, it's past time to apply a common standard to all those who help consumers decide where to put that money.

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