c.2013 New York Times News Service

c.2013 New York Times News Service

When you seek advice from a professional about where to invest your retirement savings, you hope the advice giver is acting in your best interest — not profiting at your expense.

But right now it’s all too easy for stock and insurance brokers to avoid rules that require them to put their customers first, particularly when dealing with their individual retirement money.

The Labor Department, which oversees retirement plans, is working on regulations to change that, at least as far as your individual retirement accounts, 401(k)s and related accounts are concerned. But the insurance and brokerage industries, with the support of some members of Congress, are waging a campaign against any proposed rules, fearing the effect they could have on the way brokers are paid.

“This is all about insurance agents and brokers who want to provide advice that is in their own best interest and to continue selling high-cost products in IRAs,” said Mercer Bullard, an associate professor at the University of Mississippi School of Law. “This debate is all about IRAs. That is where the money is.”

There are certainly tall piles of money at stake. IRA assets totaled $5.7 trillion at the end of March, according to the Federal Reserve, a large chunk of which comes from rollovers from 401(k)s and other employer-sponsored plans. The Labor Department estimates that another $3.8 trillion was held in 401(k)-type plans at the end of June; a significant piece of that will continue to pour into IRAs.

Here is how the issue could affect a consumer: Let’s say you are thinking about rolling over your 401(k) retirement plan into an IRA, and you call a broker for suggestions. Because the advice provided is “one-time” advice, experts say, the broker doesn’t have to recommend products in your best interest.

In fact, when it comes to IRAs and some other retirement plans, brokers and insurance agents need to meet a five-part test before they are obliged to act as fiduciaries, which is the legal term for advisers who are required to put their clients’ interests ahead of their own. One of the conditions that lets them avoid the fiduciary requirement is providing advice on a one-time basis.

But if Phyllis Borzi, who oversees retirement plans at the Labor Department, has her way, that will change. She is trying to update the rules so they apply to a broader group of professionals when they are advising on retirement plans.

“We are trying to hold people accountable to make sure the advice they give is in the best interest of customers and objective,” Borzi, assistant secretary of the department’s Employee Benefits Security Administration, said in an interview.

But the rule faces significant headwinds. Opponents achieved a small victory this week: The House passed a bill, oddly named the Retail Investor Protection Act although it would in reality delay, and potentially kill, the Labor Department’s proposed rules. (The bill, written by Rep. Ann Wagner, R-Mo., passed with the support of 30 Democrats Tuesday, although the White House said President Barack Obama would veto the bill if it reached his desk.)

Critics, including the Securities Industry and Financial Markets Association, whose members include big Wall Street firms, and the Financial Services Institute, which represents smaller independent advisers, argue that small investors could be hurt by the rules.

“Our fear is the rules will include a lot of hoops and hurdles in order to do business that is compensated through a commission,” said David Bellaire, executive vice president and general counsel of the Financial Services Institute. “And that they will be so extensive that advisers will choose to not do business with smaller investors.”

Borzi told me there were no plans to ban commissions and some of the other fees the brokerage industry was nervous about.

“Our intent is not to put people out of business,” Borzi said, adding that the public would have time to comment on the proposals before final rules are issued. “Our intent is to protect consumers from conflicted investment advice.”

She acknowledged, however, that a close look would be given to payments that might bias professionals’ advice or provide them with financial incentives to steer customers into certain investments in a retirement account.

It is not entirely clear how the rules would govern arrangements like revenue sharing, in which mutual fund companies share a portion of their revenue with the brokerage firm selling the fund. The practice might, for example, encourage the brokerage firm to put a fund on its “preferred” list.

Complicated arrangements like these are entrenched in the way these firms do business. Brokers generally “manage” such conflicts by disclosing them. But there are other solutions that are far more investor-friendly. In the case of revenue-sharing, for instance, Bullard said the Labor Department could prevent the firms from accepting higher payments for some funds over others to eliminate the incentive to sell the product that pays more.

A stronger fiduciary responsibility would help protect investors against firms that encourage their salespeople to push their own products or that require brokers to meet certain quotas. MetLife, for instance, recently told its sales force that at least $60,000 of its new $90,000 sales minimum must come from the sale of its own products. A spokesman noted, however, that starting next year, brokers will not be paid more if they sell MetLife products.

Some of the Labor Department’s critics would rather have the Securities and Exchange Commission lead the way with new regulations. Dodd-Frank, the financial reform act signed into law in 2010, gave the agency authority to propose a rule that would require stockbrokers and insurance agents to act as fiduciaries — but it stopped short of requiring that the SEC write rules. (Brokers are required only to recommend “suitable” investments, while investment advisers must act in their clients’ best interest. The SEC rule would generally put them on even footing). Three years after Dodd-Frank, it is still unclear whether the SEC will move forward.

“The perception is that the SEC will write a more industry-friendly rule, in part because the SEC is not headed by Phyllis Borzi,” said Barbara Roper, director of investor protection for the Consumer Federation of America, a consumer advocacy group, “and in part because the securities fiduciary laws are more flexible than ERISA,” a reference to the Employee Retirement Income Security Act, which governs retirement plans.

The Financial Services Institute and SIFMA, the Wall Street trade group, have said they support a fiduciary standard for brokers as long as they don’t have to eliminate their conflicts of interest but are permitted to “manage” them with disclosures.


“I can operate with that conflict if the client gives me the OK to do so,” said Bellaire, who said his group’s members were Main Street brokers and advisers. “That is the investment adviser’s fiduciary standard, and we expect some variation of that to be in the final SEC rule.”

The brokerage and insurance industries are voicing their concerns before they have even seen a proposal, which could come next year. Their nervousness stems from a proposal by the Labor Department three years ago that they found too onerous. Those proposed rules were retracted a year later.

“What the industry is trying to do is bottle up the rule so that the re-proposed rule never gets out for public comment,” Roper said. “Part of what they are saying is, ‘If we had to make our charges transparent then no one would pay them.’”