Ed. note: This is cross-posted on the U.S. Department of Labor's blog. See the original post here.
Today, we are taking the next step in President Obama’s historic push for the strongest consumer protections in America’s history. As the President called for in February, the Department of Labor is proposing to update rules to protect Americans saving for retirement and crack down on conflicts of interest in retirement advice that are costing middle-class and working families billions of dollars every year.
The President takes a backseat to no one when it comes to strengthening consumer protections. That’s why he fought to create the Consumer Financial Protection Bureau (CFPB), an independent watchdog that has already enhanced safeguards across mortgage, credit card, debt collection, and student loan servicing markets, while putting more than $5 billion back in the pockets of more than 15 million wronged consumers through enforcement actions. Recently, the CFPB took an important step toward cracking down on abusive practices in payday lending, yet another example of how this critical consumer watchdog is delivering for the American people.
The Department of Labor’s proposed rule adds to those protections, by reflecting a simple, commonsense principle: Retirement advisers should put their clients first and give advice that is in their clients’ best interest.
Too often today, that’s not the case. Retirement advisers and Wall Street brokers can direct their customers to products with higher costs and lower returns simply because they get backdoor payments or hidden fees, often buried in fine print, that encourage them to recommend these bad investments. As hard as it may be to believe, under the current rules, advisers can recommend products that are good for their bottom line but not as good for their clients.
That’s because the safeguards in this area have fallen woefully behind the way people save for retirement. When the rules were last overhauled almost 40 years ago, Individual Retirement Accounts (IRAs) had just been created and employer-based 401(k)s did not even exist. Today, American workers have more than $7 trillion invested in IRAs and more than $4 trillion in 401(k)-type plans. For that reason, getting workers good advice is more important than ever.
To be clear, many advisers are hardworking women and men who got into this line of work to help families achieve retirement security, and already provide high-quality advice that is in their clients’ best interest. Nonetheless, the losses to some middle-class and working families from the existing loopholes are huge.
Poor investment advice stemming from conflicts of interest sap about 1 percentage point of returns every year, and — like compounding interest — these compounding losses mount over time. Over the course of 35 years, a person getting conflicted advice could lose more than a quarter of their expected savings relative to someone getting advice in their best interest. In other words, instead of a $10,000 retirement investment growing to more than $38,000 over that period after adjusting for inflation, it would be just over $27,500.
That’s unacceptable and it has to change.
Today’s proposed rule would ensure that the people providing you with retirement investment advice are working in your best interest. And it includes streamlined, flexible ways to comply with that goal, for example by allowing advisers to enter into a new and enforceable best interest contract before they can receive any payments that might bias their advice. It’s a straightforward agreement so you know you’ll get advice on investing your retirement savings that puts your interests first.
The many advisers already putting their customers’ best interest first deserve the level playing field for offering quality advice that this rule will provide. In 2010, the Department of Labor put forward a draft of a rule to attempt to create that level playing field — but after significant feedback on how the proposed rule would impact the market for retirement advice, DOL withdrew that proposal and went back to the drawing board. Since then, we’ve worked with industry, consumer groups, retirement advocates, academics, and the public to gather feedback and rework the rule.
Today’s proposal, through enhancements like the best interest contract exemption, makes major strides toward addressing the concerns that were raised. We look forward to receiving additional feedback over the 75-day comment period that will help shape a better, stronger rule that minimizes burdens for those giving good advice. We are committed to getting it right.
But while we expect plenty of good faith input from all manner of commenters, for some special interests and their allies in Congress, the only good rule would be no rule at all. We want to make very clear that inaction is not an acceptable outcome of this process. We believe that any adviser acting in their clients’ best interest should support this rulemaking. And those who aren’t already committed to those same high standards will have to start putting their clients best interest first.
America’s families are losing $17 billion of their hard-earned retirement savings annually — representing tens of thousands of dollars for many individual families over the course of a lifetime of saving. We should all agree that financial advisers should always act in their clients’ best interest. Today marks an important milestone toward that change.