23 July 2019

The Fight Over Protecting Retirement Savings

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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 Republicans.

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.

Click here to access the full article on USA Today.

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