The New Retirement Investing Rule Is Great — but Your Broker Can Still Rip You Off

The New Retirement Investing Rule Is Great — but Your Broker Can Still Rip You Off


Middle-class Americans received protections for $14 trillion in retirement savings this week, as the Department of Labor finalized its long-awaited fiduciary rule, which has been in the works for almost the entire Obama administration. The impulse behind the rule is simple: to ensure that investment advisers for retirement plans operate in the best interest of their clients rather than for the benefit of their corporate treasuries.

Until now, there was no rule preventing investment advisers from providing conflicted advice to holders of individual retirement accounts (IRAs). An adviser could recommend mutual funds or annuities from their own affiliates, getting hidden commissions for funneling customers into them, and generating higher fees than similar products. The White House estimates that small savers lose as much as $17 billion a year from this type of conflicted advice. Finally, that should come to an end.

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The financial industry did succeed in inserting some fine print. The implementation period got extended to one year instead of eight months, pushing it into the next administration. Advisers will also still be able to tout their own firm’s products over a rival’s, as long as they certify through a “best-interest contract” that their clients won’t be scammed. Only one best-interest contract will have to be signed per client, no matter how many products they purchase or how many customer service representatives handle the account. Existing clients will only get a notice instead of a signed contract. And advisers can still offer newsletters, marketing materials and “general investor education” that wouldn’t be covered by the best-interest contract; only individual advice applies.

Despite these potential loopholes, the rule represents a giant step forward for ordinary investors, who no longer have to battle their own advisers for the best deal for their retirement.

Wins like this over the financial industry don’t happen every day. This is a testament to the perseverance of public servants like Labor Department official Phyllis Borzi, who willed this rule into existence. It also shows the influence of the Elizabeth Warren wing of the Democratic Party, which found itself less willing to heed the cries of disaster from the finance lobby over this rule.

However, as admirable as this rule is, it does not cover all investors. The Labor Department rule is limited to retirement plans, whether IRAs or 401(k) plans linked to an employer. People are limited in how much money they can place in such retirement accounts in a given year. Any other investment savings must go into a separate brokerage account. And those accounts remain governed by a less-stringent “suitability” standard, meaning that advisers must recommend investments suitable for their clients, without having to necessarily act in their best interest.

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Only the Securities and Exchange Commission (SEC) has the authority to issue blanket rules governing all investment advisers and broker-dealers. The Labor Department asserted authority over retirement accounts based on the 1974 Employee Retirement Income Security Act, or ERISA. But the SEC has failed to institute any rule for the broader market, amid infighting and suspicion that the end product would simply reflect a giveaway to Wall Street.

Congress made its feelings known on this in the Dodd-Frank Act, explicitly charging the SEC with studying and thereafter devising a uniform fiduciary standard. That was six years ago, but the agency hasn’t moved forward, despite prodding from the financial industry, which has better relationships with the SEC and would have preferred that it set the tone for these rules rather than the Labor Department.

SEC Chair Mary Jo White, who has come under fire from reformers for her friendliness with Wall Street, committed the agency to completing a uniform fiduciary rule only after the Labor Department announced its revamped rule last February. But both Democrats and Republicans on the commission were skeptical, for different reasons.

Republican commissioners didn’t want any new rules whatsoever, warning that higher costs for advisers would lead them to pull their services for middle-class savers and leave those investors in worse shape. This is a peculiar claim: that investors can only receive advice from professionals if it’s used to rip them off.

On the flip side, The Wall Street Journal reports that Democratic commissioners believed that any rule spearheaded by White would be inadequate, and would harm the Department of Labor process by giving the industry an alternative to tout. So White was alone in seeking the rule change.

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Now that the Labor Department rule is out, the SEC’s ability to shape a uniform standard has been compromised. The agency still claims that it’s on track to propose a rule by October. But while it still retains the authority to do that, its regulators must take into account how advisers are already adapting to the Labor Department’s implementation. The SEC has said that navigating the at times contradictory mandates from Dodd-Frank could put a final fiduciary standard years away. If the industry is already complying with stricter Labor Department rules and showing no difficulty, it puts pressure on the SEC to bring up its standards.

The coalition that fought off Wall Street to make the Labor Department rule a success will also play a role. They could reasonably ask: Why shouldn’t investors have the same kind of security in non-retirement accounts that they do in their IRAs and 401(k) plans? Why should some brokers be able to take commissions for pushing clients into high-fee proprietary products, when others cannot?

The SEC has been remarkably consistent in missing timelines for promulgating rules under Dodd-Frank, and when it has finished them, they often have plenty of safety valves for the industry to exploit. Right now there’s a big discrepancy in the way investors get treated outside of retirement plans and inside them. The SEC can fix that, but it has to show some actual will to follow its mission and protect investors.