Saving for retirement: Obama proposal sets up Wall St. fight

WASHINGTON — Tapping the anxieties of aging baby boomers, President Barack Obama on Monday called for tougher standards on brokers who manage retirement savings accounts, a change that could affect the investment advice received by many Americans and aggravate tensions between the White House and Wall Street.

The Labor Department submitted a proposal to the White House Monday that would require the brokers who sell stocks, bonds, annuities and other investments to disclose to their clients any fees or other payments they receive for recommending certain investments.

“If you are working hard, if you are putting away money, if you are sacrificing that new car or that vacation so you can build a nest egg for later, you should have the peace of mind of knowing that the advice you are getting for investing those dollars is sound,” Obama said in a speech to the AARP, the retiree advocacy group. “These payments, these inducements incentivize the brokers to make recommendations that generate the best returns for them but not necessarily the best return for you.”

The proposed rule, which could be months away from actual implementation, has been the subject of intense behind-the-scenes lobbying, pitting major Wall Street firms and financial industry groups against a coalition of labor, consumer groups and retiree advocates such as the AARP.

Americans increasingly are seeking financial advice to help them navigate an array of options for retirement, college savings and more. Many people provide investment advice, but not all of them are required to disclose potential conflicts of interest.

Under current rules, brokers are required to recommend only “suitable” investments based on the client’s finances, age and how much risk is appropriate for him or her. The rules would make brokers handling retirement accounts obligated to put their clients’ interests first.

“The challenge we have is right now there are no uniform rules of the road that require retirement advisers to act in the best interests of their clients,” Obama said.

The Labor Department’s proposal must now undergo an internal review by the White House budget office. After that, it likely will be put out for public comment for several months.

The administration first proposed a regulation in 2010, but pulled it back following an industry outcry that the proposal would hurt rather than help investors by limiting choices. Even some Democrats urged the White House to go back and redraw their plan.

To buttress the new effort, the White House on Monday released a 30-page report from its Council of Economic Advisers noting that an estimated $1.7 trillion of individual retirement account assets are invested in products that pay fees or commissions that pose conflicts of interest.

Obama cited academic studies that conclude investors who receive investment recommendations potentially influenced by conflicts of interest sustain a 1 percentage point lower return on their retirement savings, totaling losses of $17 billion every year to middle-class families.

Industry officials dispute those studies and say the industry is well governed by financial regulators like the Securities and Exchange Commission. They say the Department of Labor is ill suited to write rules best left to agencies more familiar with the financial industry.

“You have the Department of Labor, which really doesn’t know this area,” said Ira Hammerman, general counsel for the Securities Industry and Financial Markets Association, the brokerage industry’s lobbying group. “Our concern is they are not going to get it right, just like they did not get it right in 2010.”

AFL-CIO President Richard Trumka said the proposed protections are overdue, noting that much of the current regulatory regime was set before 401ks and IRAs gained prominence as retirement savings vehicles. He predicted a difficult path to a final rule, however, given the financial industry’s opposition.

Meanwhile, the SEC is studying the broader investment advice industry to determine whether it should come under further regulations. Critics of the Labor Department effort say the Obama administration should leave the regulations to the SEC or it will risk limiting the advice available to investors with relatively small retirement savings.

“Investors benefit from choice; choice of products and choice in advice providers,” SEC Commissioner Daniel Gallagher, a critic of the Labor Department approach, said in a speech Friday.

To confront industry criticism, the White House has drafted former Vanguard chief executive and founder John C. Bogle to lend his support to the administration effort. Bogle said the disadvantages faced by small investors are not due to bad intent by brokers but because of a system that rewards salesmanship.

“These things are very difficult to change, basically, the ethos of the whole industry,” he said, in a call arranged by the White House. “It’s not manipulative, deceptive and fraudulent; it’s a gradual sapping of an investor return.”

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