The Fight Over Protecting Retirement Savings
WHY YOU SHOULD CARE
The retirement nest eggs of most U.S. households are at stake.
This OZY encore was originally published Oct. 27, 2014, and has been updated to reflect recent developments.
The White House is finally ready to talk — and loudly — about a $10 trillion question over how much money savers will have in their pockets when they retire. And by “savers,” we mean nearly 70 percent of American households.
Here’s the issue: 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? Put another way, should financial professionals be required to maximize your gains even if it means a smaller profit for themselves? The issue has provoked a huge, yearslong political rift between consumer advocates and Wall Street lobbyists. But before last fall’s elections, the White House postponed any decision — and went silent, refusing any comment — apparently out of fear of losing more votes to conservatives.
Now that the GOP controls the Senate, but without a strong-enough majority to override White House vetoes, President Obama is pressing forward. In a press conference last week with Sen. Elizabeth Warren to an AARP audience, he announced the Labor Department will soon propose new rules to toughen standards by eliminating conflicts of interest for more financial advisers.
People are having their pockets picked. The Department of Labor is trying to do something about it …
Barbara Roper, director of investor protection, Consumer Federation of America
The AARP, the Consumer Federation of America, shareholder-rights activists and, most of all, the Department of Labor have long supported the tougher standards. But in the months before the November elections, the proposal stalled as Democrats vied for the hearts, minds and generous campaign contributions of Wall Street executives, who tend to favor Republicans. The Obama administration’s ensuing silence set off widespread hand-wringing on both sides of the debate.
“What’s the White House going to do? That’s what we’d like to know,” Carol Danko, representative for the Securities Industry and Financial Markets Association (or SIFMA, Wall Street’s lobbying group fighting the Labor Department’s proposal) said last year. Those who backed the tighter regulation had worried. Said Barbara Roper of the Consumer Federation of America: “People are having their pockets picked. The Department of Labor is trying to do something about it, and the White House needs to get behind that effort if it’s serious about promoting retirement security.” At the time, the White House would not comment.
Assistant Labor Secretary Phyllis Borzi ignited the debate in the fall of 2010 when she proposed expanding the list of advisers who have a fiduciary duty to those enrolled in company 401(k) plans. Wall Street pushed back hard, and by last fall, four years later, the rule still hadn’t seen the light of day. Industry lobbying against it remained intense, and earlier in 2014, the White House took direct oversight of the Labor Department’s handling of the issue.
Behind Borzi’s initial proposal was a fundamental shift in employer-sponsored retirement plans: In 1979, of all employees with a company-based retirement plan, 84 percent had a defined benefit such as a traditional pension, and 38 percent had a defined contribution plan like a 401(k). By 2011, that had flipped: 93 percent of workers with a retirement benefit had a 401(k) or the like, and 31 percent had a pension. (Some employees had both.)
A company offering a 401(k) plan 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 investment options — don’t have the same obligation. They are also retail brokers who sell financial advice on a myriad of mutual funds, IRAs and other investments, including many that could be potential 401(k) offerings. Labor Department officials say they have an incentive to steer employees to higher-cost investments — especially those offered by themselves. But these activities fall outside the Labor Department’s current definition of a fiduciary. That’s what Borzi wants to fix.
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, assuming no additional contributions, the balance will be $227,000 at 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, said his group has been consistent in saying “we see no evidence that there’s a systematic harm being done.” He said a new proposal must fix the original flaws, but also prove there’s a problem in the first place.
And he wants the Department of Labor to coordinate any change to its definition of “fiduciary” with those the Securities and Exchange Commission (SEC) is contemplating. Consumer groups say the Labor Department shouldn’t wait for the SEC, which is notoriously slow on consumer issues. They suspect Wall Street’s ultimate aim is a wider-scale replacement of the fiduciary standard with a “suitability” one, which would allow brokers to push higher-cost products that aren’t necessarily in a client’s best interest.
For now, though, the Labor Department seems to have won. It’s expected to propose a new rule, possibly in the coming weeks, and a final version could come by summer. Woe to any politician who opposes it, but still wants retirees’ votes.
* Correction: An earlier version of this article misspelled the acronym SIFMA.