Roth IRA, retirement products face crackdown from the Obama administration
Brokers with conflicts of interest cost American investors with IRAs or other retirement plans as much as $17 billion every year, according to a report released Monday by the White House Council of Economic Advisers.
The report came as the Obama administration聽to crack down on those advisors with rule changes that would require them聽to act in the best interest of investors, not those who may be paying them on the side.
鈥淚f 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,鈥� Obama said Monday afternoon in a speech to the AARP in Washington. 鈥淭hese payments 鈥� incentivize the brokers to make recommendations that generate the best returns for them, but not necessarily the best return for you.鈥�
罢丑别听, which focused on individual retirement accounts, found that 鈥渃onflicted advice鈥� costs savers about 1% annually. So, for example, an account that would have delivered a 6% return one year would instead deliver a 5%.
An estimated $1.7 trillion is invested in potentially conflicted accounts, according to the report.
In an example provided by the White House, a worker who rolled a $100,000 401(k) into an IRA at age 45 could lose $37,000 in potential earnings on that account by age 65 because of conflicts of interest by an advisor.
鈥淢any Americans rely on professional financial advice when they make decisions about their retirement savings,鈥� Richard Cordray, director of the federal Consumer Financial Protection Bureau, said at the AARP event. 鈥淪o it is critical that when they seek out professional guidance, they can trust the financial advisor to put the consumer鈥檚 interests first.鈥�
According to the White House, financial advisors today may legally accept 鈥渂ackdoor鈥� payments or other hidden fees for directing investors toward savings plans that may not be in their best interest. Current regulations state only that they must recommend 鈥渟uitable鈥� retirement account options.
Obama is directing the Department of Labor to begin making new rules to govern such behavior.聽The Labor Department鈥檚 initial proposal would require brokers who sell stocks and other investments to let their clients know if they receive any fees or other payments for recommending certain plans.
The rules determining how retirement plans are handled have not been updated for 40 years, according to the Labor Department. When the 1974 Employee Retirement Income Security Act was passed, workplace pension managers were more often responsible for making plan decisions than outside advisors, the department says.
The monthslong process will include a period for the public, and, of course, the finance industry, to have input on any proposed changes.
This isn鈥檛 the first time Obama has attempted to rein in such conflicts. He proposed a similar rule change in 2010, but withdrew it the following year after fierce opposition from finance industry groups.
Those groups argued that the rules would have hurt investors by reducing their investment options.
