Obama puts weight behind push for fiduciary standard

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.”

One of the Labor Department's biggest targets is inappropriate investment advice for IRAs, which are largely driven by rollovers from 401(k) plans. According to the White House Council of Economic Advisers, as much as $1.7 trillion of the $7 trillion IRA market are assets in wrong or high-fee products that provide subpar returns.

Administration officials say the new proposal will look very different from a 2010 attempt that got sent back to the drawing board after a storm of criticism. This time, it will include economic analysis and several exemptions to prohibited transaction rules that would allow service providers to maintain their compensation practices, such as commissions and revenue sharing, as long as clients' interests come first and potential conflicts of interest are disclosed.

Once the proposed rule is published, the DOL will seek public comment. Mr. Obama said in a speech at AARP's Washington headquarters on Feb. 23 he expects special interests “are going to fight it with everything they've got,” but he is resolved, he said. “What I won't accept is the notion that there is nothing we can do.”

The Committee on Investment of Employee Benefit Assets, Bethesda, Md., which represents more than 100 of the largest corporate plan sponsors with $2 trillion in assets, wasted no time commending the Obama administration for moving ahead with the rule.

Long worried about conflicts of interest, CIEBA members' particular concern is what they see as aggressive marketing of IRAs to 401(k) plan participants when they leave employment that may not be the most appropriate choice for the individual. A CIEBA survey conducted last July showed 40% of rollover dollars went to the plans' record keepers.

Although 90% of CIEBA member companies surveyed want to keep assets of retirees and former employees in their defined contribution plans to provide better retirement outcomes, less than one-fourth had a program to do so, and many felt outgunned by financial services firms.

“It's as if we're shooting pistols while the industry is firing howitzers,” former CIEBA Chairman Robert Hunkeler, vice president of investments for International Paper Co., Stamford, Conn., told DOL officials last year.

“CIEBA believes that participants deserve unbiased advice,” CIEBA executive director Deborah Forbes said.

Other groups representing plan sponsors are more wary of what the new standard will change.

“If the broad prohibited transaction exemptions are workable, that would be a very good development. If not, it could jeopardize access to investment information for plan sponsors and participants, and could increase sponsors' costs and liabilities,” said Kent Mason, an attorney at law firm Davis & Harman LLP, who is outside counsel for the American Benefits Council in Washington.

Mr. Mason said the exemption process “has not worked very well over the past 40 years.”

A new approach to handling exemptions “is going to cause all the problems,” predicted Brian Graff, executive director and CEO of the American Society of Pension Professionals & Actuaries, Arlington, Va.

Mr. Graff said the administration is being shortsighted by perceiving all rollovers as bad. “What they are not appreciating is the fact that there are lots of people not satisfied with the (401(k)) offering.” If rollovers become restricted, “the participant is left on their own,” said Mr. Graff.

Particularly for smaller defined contribution plans, “the biggest problem is going to be the chilling of conversations” at call centers, said Lisa Bleier, managing director for public policy and advocacy with the Securities Industry and Financial Markets Association in Washington. “If those conversations can't happen, that's a lot of people who are going to be knocking on the door of HR,” said Ms. Bleier, who worries that it will cause more leakage of retirement assets if frustrated participants cash out rather than stay invested in a retirement vehicle.

At the Pension Rights Center in Washington, where advocates have been pushing the Department of Labor since 2010 to try again, “we think this is a really important first step to ensure that people are going to get investment advice that they can count on,” said Karen Friedman, the center's executive vice president and policy director. Having it a White House priority could make all the difference, she said. “I think it's an important legacy for Obama.”

Kathleen McBride chairs the Committee for the Fiduciary Standard, Bridgeville, Pa., a group of investment professionals and fiduciary experts who think all investment and financial advice should be rendered as fiduciary advice. “Frankly, I think the momentum is very, very good,” she said. “The general population is catching on, and that's great.”

Vanguard Group founder Jack Bogle, who has long argued the fiduciary rule should be for anybody who touches other people's money, said he is stunned by some of the negative comments before a final proposal is seen. “I didn't realize there were a lot of people who didn't want to put their clients' interests first,” he said in an interview.

“The system is crying out for change,” said Mr. Bogle. “There's this issue of, "are we saving enough,' but the biggest issue is, "are retirement plan investors getting their fair share of the marketplace?'”