With President Barack Obama now leading the charge, a multiyear battle to update a fiduciary standard for anyone giving retirement investment advice has defined contribution plan executives and service providers bracing for big changes.
“I do think it will have a pretty profound impact on the industry,” said Christopher Jones, chief investment officer at Financial Engines Inc., a Sunnyvale, Calif., independent investment adviser and fiduciary.
“It will cause some disruptions, and there will be winners and losers.” He thinks that once finalized, a new rule now called “conflict of interest for investment advice,” will prove that conflict-free investment advice is both possible and lucrative, and will be welcomed by employers and participants. “Our plan sponsors put a lot of time into creating a well-designed plan, with high-quality, low-cost investment options, and it bothers them a lot when they see predatory practices,” said Mr. Jones.
While they might have to pay more for services like investment support that record keepers now provide as part of a package of services, “I think plan sponsors will appreciate the clarity and protection” of a broader fiduciary standard “that can help them understand where they get protection and where they don't,” said Ross Bremen, a partner with investment consultant NEPC LLC in Boston.
“Generally speaking, the retirement plan is the best deal in town based on the quality of fees and investments, so anything that ensures that participants are not taken advantage of because of misaligned incentives on the part of the service provider is a good thing,” Mr. Bremen said.
With disclosure of conflicts already part of the institutional retirement world, Mr. Bremen sees the marketplace adapting to plan sponsors' needs.
As part of his campaign to do more to help the middle class prepare for retirement, Mr. Obama announced Feb. 23 that the Department of Labor sent its proposed rule changes to the Office of Management and Budget for regulatory review before formally proposing a new standard in the coming months. The new fiduciary standard, he said, would provide “uniform rules of the road” requiring anyone providing retirement investment advice to put their clients' best interest first, and bring up to date 40-year-old rules governing retirement plan investments.
White House officials also see it as a way to crack down on what Council of Economic Advisers Chairman Jason Furman said are “backdoor fees and hidden payments” charged by brokers, particularly in the individual retirement account market. “The corrosive power of fine print, hidden fees and conflicted advice can eat away, like a chronic illness, at people's hard-earned retirement savings,” Labor Secretary Thomas Perez said on a press conference call before Mr. Obama's announcement. “Many financial advisers have taken an oath to serve your best interests, but there are other financial advisers and brokers who provide critical financial advice every day and are not obligated to look out for your best interest. Consumers … deserve to know that their financial advisers are looking out for their best interests.”