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Tue Feb 24, 2015, 10:24 AM

Obama backs new rules for retirement advice

Last edited Thu Feb 26, 2015, 03:41 PM - Edit history (6)

That's the headline in the print edition of the Washington Post. The title online is different.

Obama calls for higher standards on brokers giving retirement advice

Get There
By Jonnelle Marte February 23

President Obama called on the Department of Labor to crack down on the “backdoor payments” and “hidden fees” paid to brokers giving retirement advice. ... The president endorsed a new rule proposed by the Labor Department on Monday that would increase the standards for brokers who recommend investments for retirement accounts, requiring brokers to have the client’s best interests in mind.

Under more stringent “fiduciary” standards, brokers would need to justify if they are recommending a security that is more expensive than other options available or that may be underperforming, retirement experts say. Current rules only require that the investment be “suitable,” which doesn’t place as much emphasis on cost and performance.

The exact details of the proposed rules won’t be available until the Labor Department’s announcement in a few months, but the changes are targeting Individual Retirement Accounts, which hold more than $7 trillion in savings for more than 40 million Americans. ... An estimated $1.7 trillion of IRA assets are invested in products that provide payments that lead to conflicts of interest, according to research released Monday by the White House Council of Economic Advisers.

The new rules are expected to generate strong resistance from financial institutions, which argue the added restrictions could make it more difficult for savers to get potentially useful advice. “This re-proposal could make it harder to save for retirement by cutting access to affordable advice and limiting options for savers,” said Kenneth E. Bentsen,president of the Securities Industry and Financial Markets Association.

White House Council of Economic Advisers

The Effects of Conflicted Investment Advice on Retirement Savings

Posted by Jason Furman and Betsey Stevenson on February 23, 2015 at 09:45 AM EST

CEA’s new report The Effects of Conflicted Investment Advice on Retirement Savings examines the evidence on the cost of conflicted investment advice and its effects on Americans’ retirement savings, focusing on IRAs. Investment losses due to conflicted advice result from the incentives conflicted payments generate for financial advisers to steer savers into products or investment strategies that provide larger payments to the adviser but are not necessarily the best choice for the saver.

CEA’s survey of the literature finds that:

•Conflicted advice leads to lower investment returns. Savers receiving conflicted advice earn returns roughly 1 percentage point lower each year (for example, conflicted advice reduces what would be a 6 percent return to a 5 percent return).
•An estimated $1.7 trillion of IRA assets are invested in products that generally provide payments that generate conflicts of interest. Thus, we estimate the aggregate annual cost of conflicted advice is about $17 billion each year.
•A retiree who receives conflicted advice when rolling over a 401(k) balance to an IRA at retirement will lose an estimated 12 percent of the value of his or her savings if drawn down over 30 years. If a retiree receiving conflicted advice takes withdrawals at the rate possible absent conflicted advice, his or her savings would run out more than 5 years earlier.
•The average IRA rollover for individuals 55 to 64 in 2012 was more than $100,000; losing 12 percent from conflicted advice has the same effect on feasible future withdrawals as if $12,000 was lost in the transfer.

The Effects of Conflicted Investment Advice on Retirement Savings
download as pdf
February 2015

What You Need to Know about Retirement “Conflicts of Interest,” in 3 Big Sentences:

Filed in DOL, Retirement by Lindsay Holst on February 23, 2015

Editor’s note: The following has been cross-posted from the WhiteHouse.gov blog – view the original here.

Want to dig deeper? Take a look at the new report released by the President’s Council of Economic Advisors today, which gives an in-depth breakdown of how these conflicts of interest are hurting the middle class right now.

Under our current system, your adviser can accept a back-door payment or hidden fees for directing you toward a retirement plan that’s not in your financial best interest. And it’s completely legal.

One percent a year may seem small − but you’d be surprised at how quickly it adds up.

We’re fixing it by making the system more transparent.

Here’s what happens next:

In the months to come, the Department of Labor will issue a “notice of proposed rulemaking.” That’s a fancy way of saying they’ll be kicking off the public-feedback process. Americans like you will be able to weigh in on the best approach to modernizing the rules on retirement advice and set new standards. So keep an eye out.

ETA, Thursday, February 26:

Obama Wants Rules That Force Brokers To Put Clients' Interests First

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Reply Obama backs new rules for retirement advice (Original post)
mahatmakanejeeves Feb 2015 OP
mahatmakanejeeves Apr 2015 #1

Response to mahatmakanejeeves (Original post)

Fri Apr 24, 2015, 10:08 AM

1. US Labor Department seeks public comment on proposal to protect consumers from conflicts of interest

Hat tip, the April 16, 2015 DOL Newsletter

US Labor Department seeks public comment on proposal to protect consumers from conflicts of interest in retirement advice

News Release
EBSA News Release: [04/14/2015]
Contact Name: Michael Trupo
Phone Number: (202) 693-6588
Email: [email protected]
Release Number: 15-0655-NAT

WASHINGTON — The U.S. Department of Labor has released a proposed rule that will protect 401(k) and IRA investors by mitigating the effect of conflicts of interest in the retirement investment marketplace. A White House Council of Economic Advisers analysis found that these conflicts of interest result in annual losses of about 1 percentage point for affected investors — or about $17 billion per year in total. ... Under the proposals, retirement advisers will be required to put their clients' best interests before their own profits. Those who wish to receive payments from companies selling products they recommend and forms of compensation that create conflicts of interest will need to rely on one of several proposed prohibited transaction exemptions.

"This boils down to a very simple concept: if someone is paid to give you retirement investment advice, that person should be working in your best interest," said Secretary of Labor Thomas E. Perez. "As commonsense as this may be, laws to protect consumers and ensure that financial advisers are giving the best advice in a complex market have not kept pace. Our proposed rule would change that. Under the proposed rule, retirement advisers can be paid in various ways, as long as they are willing to put their customers' best interest first."

Today's announcement includes a proposed rule that would update and close loopholes in a nearly 40-year-old regulation. The proposal would expand the number of persons who are subject to fiduciary best interest standards when they provide retirement investment advice. It also includes a package of proposed exemptions allowing advisers to continue to receive payments that could create conflicts of interest if the conditions of the exemption are met. In addition, the announcement includes a comprehensive economic analysis of the proposals' expected gains to investors and costs.

Links to the proposed fiduciary rule, prohibited transaction exemptions, economic impact analysis and other materials are available at ProtectYourSavings, and will be published for public comment in an upcoming edition of the Federal Register.

Are Your Retirement Savings at Risk?

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