DOL Unveils Proposed Rule To Protect 401(K), IRA Investors

DOL Unveils Proposed Rule To Protect 401(K), IRA Investors
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The United States Department of Labor (DOL) unveiled its proposed rule designed to protect 401(K) and IRA investors by requiring retirement advisers to act in the best interest of retirees.

Financial advisors are affected by the conflicts of interest and provide guidance to retirees that are not in their best interests. A previous White House memo to the DOL cited an academic research indicating that financial advisers often become opportunistic at the expense of their clients because of the incentives they receive from product providers. The memo noted that IRA investors using financial advisors are paying excessive fees.

An analysis of the White House Council of Economic Advisers estimated that investors incur annual losses of approximately 1% or total of around $17 billion annually from conflicts of interest. The proposed rules of the DOL aim to mitigate the impact of conflicts of interests in the retirement investment marketplace.

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Retirement advisers must put client’s best interest first

Under the proposed rule, retirement advisers must put the best interest of their clients first before their profits.

In a statement, DOL Secretary Thomas Perez emphasized that concept if the new rules are based on a very simple concept, “if someone is paid to give you retirement investment advice, that person should be working in your best interest.”

Secretary Perez noted that noted that the existing laws failed to keep pace with the complex market to protect consumers and ensure that financial advisers are giving the best advice. He emphasized that the proposed rule will change that situation, and retirement advisers may receive incentives in different ways as long as they are willing to put their clients’ best interest first.

DOL proposed rule would update, close loopholes

The proposed rule of the DOL will update and close the loopholes in the existing regulation that is almost 40 years old. It will also expand the number of people subject to fiduciary best interest standards.

The DOL also proposed a “best interest contract exemption,” a new approach that is broad, flexible, principle-based that can adapt to evolving business practices.

Retirement advisers and their firms are required to acknowledge their fiduciary status, enter into a contract with their clients, and explain investment fees & costs clearly. They must also provide proper policies and procedures to mitigate harmful effects of conflicts of interests, and retain certain data on their performance.

Fiduciary advisers who will enter into a contract with clients may receive common types of fees such as commissions, revenue sharing, and 12b-1 fees. Those who will not enter into contracts must refrain from recommending investments that provide conflicted compensation unless the payments fall under another exemption.

The DOL set a 75-day comment period for the proposed rule, and a public hearing will follow. Secretary Perez said the plan would undergo a thorough evaluation.

Analysts from RBC Capital opine:

Our initial take after going through the Department of Labor’s proposed new rule, released Tuesday afternoon, to expand the scope of who’s considered a “fiduciary” when they sell 401K plans and IRA’s: The proposal is less onerous than we had expected it to be.

Our best sense from our many conversations on this topic with investors over the last few days is that the proposal from the DOL is also less onerous than investors had expected. In short, while we still view the proposed new rule as a negative for the big IRA and 401K companies in our coverage universe (Prudential, Ameriprise, Voya, and Principal) because we believe the new rule will make the entire sales process a lot longer and more cumbersome than it is at present, we also believe the proposal came out to be not nearly as damaging as it could have been.

Accordingly, we expect the stocks to trade higher still today, continuing a rally that began after the DOL released its proposal during market hours Tuesday. And we reitereate our Outperform ratings on AMP, VOYA, and PFG and our Sector Perform rating on PRU.

The analysts further note:

Stockbrokers at Merrill Lynch, UBS, Wells Fargo, Morgan Stanley, Ameriprise, and Linsco Private Ledger (LPL) who currently open up 401K’s but consider themselves subject to a suitability standard would under the DOL’s proposal face no ambiguity: If they give investment advice for a fee in connection with the opening of these 401K plans, they’be considered fiduciaries.

That means that going forward they’d have to always do what’s best for the customer. This is in contrast to the suitability standard, which only requires that a 401K salesperson do what’s suitable for the customer.

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