Should the Department of Labor expand the list of so-called
"fiduciaries," financial advisers who by law must act in the best
interest of retirement savers? The issue's provoked a huge political scrape
between consumer advocates and Wall Street lobbyists. And with control of the
Senate up for grabs, the White House has postponed any decision, apparently out
of fear of losing more votes to conservatives. If Republicans do win control,
they could be in a position to overturn any White House decision or perhaps
just discourage the White House from moving forward.
The AARP, the Consumer Federation of America,
shareholder-rights activists and, most of all, the Department of Labor have all
lined up in favor of tougher investment-advice standards, which would affect
$10 trillion of retirement savings and 68 percent of U.S. households. But the
proposal has stalled as Democrats vie for the hearts, minds and generous
campaign contributions of Wall Street executives, who tend to favor
Assistant Labor Secretary Phyllis Borzi ignited the debate
in the fall of 2010 when she proposed expanding the list of who has a fiduciary
duty to those enrolled in company 401(k) plans. Wall Street pushed back hard.
The agency withdrew its proposal with a promise to fix it along lines industry
wanted and reissue it. Four years later, it hasn't seen the light of day.
Industry lobbying against it remains intense. Earlier this year, the White
House took direct oversight of the Labor Department's handling of the issue.
Those involved in the talks say the White House decided a new proposal wouldn't
come out until next year, well after the midterm elections.
Behind Borzi's initial proposal is a fundamental shift in
employer-sponsored retirement plans: In 1979, of employees with a
company-based retirement plan, 84 percent had a defined benefit like a
traditional pension and 38 percent had a defined contribution plan like a
401(k). By 2010 that flipped: 93 percent of workers with a retirement benefit
had a 401(k) or the like, and 31 percent a pension.
A company offering a 401(k) does have a fiduciary duty to
run it in the best interest of beneficiaries. But the Wall Street guys —
typically hired for advice on how to set up the plans, run them and decide the
menu of investments options — don't have the same obligation. They are also
retail brokers who sell financial advice on myriad mutual funds, IRAs and other
investments, including many that could be potential 401(k) offerings.
Labor Department officials say that employees often look at
educational materials from these servicers as investment advice. And servicers
have an incentive to steer employees to higher-cost investments — especially
those offered by the servicers themselves — which a fiduciary standard wouldn't
allow. But these activities fall outside the Labor Department's current
definition of a fiduciary.
When employees leave a company, they often get a barrage of
marketing material suggesting they move their money from the 401(k) plan to an
IRA, even if costs are higher, according to a recent study by the Government
Accountability Office, the research arm of the U.S. Congress. Servicers feature
their own IRAs and other investments in educational material.
Small differences in fees can add up. Take an employee with
35 years until retirement and $25,000 in a 401(k). If yearly returns average 7
percent and expenses 0.5 percent, and assuming no additional contributions, the
balance will be $227,000 by retirement. But raise fees to 1.5 percent and the
balance will be $163,000, a reduction of 28 percent.
Wall Street argued Borzi's first proposal would put
servicers for employer-sponsored plans in a straitjacket, restricting consumer
choice. Backers say a few changes would easily address Wall Street's concerns,
but that Wall Street has moved the goalposts, saying no update is needed.
SIFMA chief executive Kenneth E. Bentsen Jr., a former
Democratic member of Congress, wants Labor to coordinate any change to its
definition of fiduciary with those the Securities and Exchange Commission is
contemplating. Consumer groups say Labor shouldn't wait for the SEC, which is
notoriously slow on consumer issues. They suspect Wall Street's aim is for
fiduciary rules to be changed to a "suitability standard," which
would allow brokers to push higher-cost products not necessarily in the
client's best interest.
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