U.S. Chamber: New broker rules threaten 401k’s for middle-class

Veto expected on congressional resolution to stop the rule


New rules being pushed by the U.S. Department of Labor (DOL) could make it difficult for many investors, including smaller businesses in South Carolina, to invest in retirement, according to one industry group.

Alice Joe, director of the U.S. Chamber’s Center for Capital Markets Competitiveness, told Palmetto Business Daily the proposed rules by the DOL will squeeze out small- to middle income retirement savers, as well as small businesses looking to offer retirement benefits to their employees. She said the move is particularly hard on younger savers, since it takes away the choice to self-manage retirement investments by working with a broker, instead of a fiduciary manager.

“You can choose any provider you want right now,” Joe said “What the DOL rule does is essentially takes that choice away from you.”

Released in its final form on April 6, the new rule requires that broker’s act under the same rules as investment advisors when when advising on 401k transactions. Investment managers are typically used by higher-balance investors who wish to take a hands-off approach to their investments, with the manager continually monitoring and making changes to the investment account in the client’s best interest, in accordance with the Investment Advisors Act of 1940. Brokers, meanwhile, only have to act as advisors for the duration of a single transaction, such as a stock or mutual fund transaction.

The new rule means brokers will have to continuously monitor the account of clients looking to make transactions related to their retirement account, the same was an investment manager would.

The DOL defended the rule, saying it would save “tens of billions of dollars for middle- and working-class families,” for whom they claim “conflicted” retirement advice results in a return of one percent point lower return on their money.

Joe said, however, that far from helping investors get better returns, the rules onerous mandates would limit choice and increase the cost of investment advice.

“Particularly for some of the smaller savers who have lower balances, it’s particularly devastating,” Joe said. “Because now, what the rule has done is said ‘we’re letting broker-dealers still take a commission…but they now have to monitor your account on a much more frequent basis,’ which is going to be much more expensive.”

In addition to the impact on individuals, she said the new rules also makes it more difficult for small businesses to offer a retirement plan to employees. Any employer offering a buy-in to a retirement plan would be classified as a fiduciary, she said, with the only exception being for employers managing a plan with more than $50 million in assets.

Opposition has already mounted against the rule, with Congress passing a resolution of disapproval in late April, effectively stopping the rule. The resolution, however, is unlikely to stand up, as it passed both houses along party lines and without a veto-proof majority. President Obama, who pushed for the new rules in February, is expected to veto the measure.

Opponents to the latest rule, however, argue that they are equally as interested in protecting investors. Joe said that implementing the rule will be costly for brokers — a cost she said will likely be passed on to the investor. She said she and the Chamber wished the DOL would have implemented the rule in a more “streamlined” manner.

“I don’t think anybody disagrees that financial advisors should act in an investor’s best interest, I think everybody in the industry agrees with that,” Joe said. “Where many people take exception is the method in which the (DOL) took in implementing the best interest standard by putting all these restrictions … that makes it really tough to do.”

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