Democrats Against ObamaSave Bipartisan opposition builds to Labor’s new fiduciary rule.
http://www.wsj.com/articles/democrats-against-obamasave-1444601940
President Obama’s plan to reform retirement savings could more than double the cost of investment advice for many savers. That’s why Democrats on Capitol Hill are now demanding a rewrite and even Hillary Clinton still hasn’t endorsed it. Meanwhile, Mr. Obama is helping state governments compete against the private financial advisers his rule punishes.
The ostensible pitch for the Labor Department’s rule is that when savers are rolling over money from a 401(k) retirement plan into an Individual Retirement Account, they should be advised only by people committed to acting in their “best interest.” It sounds great, except serving as a “fiduciary” in this manner comes with so many rules and carries so much potential liability that few people will do it unless investors pay them a lot of money.
If costs are irrelevant, many would argue it’s in the best interest of a driver to travel in a Mercedes rather than a Chevrolet. But in the real world consumers like having options. For the typical investor, brokers provide a useful service and even if they aren’t fiduciaries they too are heavily regulated to make sure they recommend investments that are “suitable” for the client.
Brokers are typically paid on commission, while fiduciaries tend to collect a fixed percentage of the client’s assets each year. Mr. Obama’s preferred business model costs more than twice as much as the alternative. A recent study by Cerulli Associates found that while the current commission model costs on average 0.5% of assets, the fee-based model would cost 1.1% of assets plus additional fund expenses. Labor’s rule could effectively kill the commission model in retirement plans by requiring a fiduciary standard for dispensing advice.
An estimated 45% of Americans have accounts with less than $25,000, according to the Employee Benefit Research Institute, which is the minimum required balance Primerica could find for a fee-based broker. Without the commission model, these investors would need to settle for computer generated robo-advice.
Labor Secretary Tom Perez has told legislators that “we’re all ears,” but bipartisan opposition is mounting because there’s no indication Team Obama is altering its regulatory course. Nearly 100 House Democrats signed a letter to Mr. Perez on Sept. 24 requesting changes to the adviser regulation. They expressed support for a rule to protect investors but wrote that “it is vital that the proposal doesn’t limit consumer choice and access to advice, have a disproportionate impact on lower- or middle-income communities or raise the costs of saving for retirement.”
Even as it seeks to drive many financial advisers out of the retirement business, the Administration is also cooking up a plan to help state governments grab a share of this market. In a July speech at the White House Conference on Aging, Mr. Obama said he’s called on Labor “to propose a set of rules by the end of the year to provide a clear path forward for states to create retirement savings programs.”
Seven states including California, Illinois and Oregon have passed legislation for such programs, and in 2015 alone 15 states have introduced bills. However, states are waiting to implement their plans until they are deemed exempt by the Labor Department from the rules that govern private industry under the Employee Retirement Income Security Act.
Yes, that’s the law under which Labor is about to place the new fiduciary burden on private competitors. This is looking like the perfect Obama Administration program: harming a law-abiding industry, making services more costly to the consumers it claims to be helping, and then encouraging them to become dependent on government programs that create new risks for taxpayers.
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