A plan by the Department of Labor to allow brokers to sidestep stringent requirements for giving advice on retirement accounts if they sell index funds or other approved products faces an increasingly uphill battle.
This week, a top trade group for the $33.4 trillion global industry that includes mutual funds came out against the full Labor Department proposal, saying it “falls short and is unworkable.”
And an investor-advocacy group that has been deeply supportive of the Obama administration's plans to reshape standards of advice around retirement plans has said it's unlikely for a final rule to include the so-called “low-fee streamlined exemption.”
That safe harbor is one of the contentious elements of the Labor Department's broader efforts to require brokers act in their clients' best interest and disclose any conflicts when offering guidance for retirement investment accounts.
The
rule also raises the possibility that standards regulators apply to investment advice could steer investors to a far narrower range of investment products and providers.
In its proposal, the Labor Department said academic literature generally, though not universally, supports the idea of investors buying and holding “a diversified portfolio of assets calibrated to track the overall performance of financial markets.”
FEW CHOICES
The agency cited a low-cost, index-tracking target-date fund “consistent with the investor's future risk appetite trajectory” as an example of a high-quality investment for long-term investors. Just nine U.S. fund companies offer such products and one company, the Vanguard Group Inc., controls four-fifths of the $252 billion market, according to an
InvestmentNews analysis of data by Morningstar Inc.
For a shorter time period of five to 10 years, the Labor Department said a “risk-matched balanced fund or combination of funds” was an example of a recommendation also “likely to be sound” from the point of view of academic literature. That group could potentially include a larger range of funds.
It's unclear whether the examples of balanced funds and index-tracking target-date funds reflect the federal government's views about passive investing vs. active investing or were just examples.
The more-stringent standard for brokers is at the heart of a regulation that seeks to limit conflicts of interest for retirement advice that may cause some brokers to steer investors into low-quality investments with high costs. The White House Council of Economic Advisers has said conflicted retirement-savings advice costs investors up to $17 billion annually.
Privately, industry officials said the safe harbor is too vague. And some supporters of aggressively enforced fiduciary standards have also
taken exception to the idea of evaluating funds solely on cost.
NOT READY FOR PRIMETIME
“I haven't heard anyone who's had good ideas on how to do it,” said Barbara Roper, director of investor protection at the Consumer Federation of America, an advocacy group. “I don't think it's going to be ready for primetime.”
Meanwhile, the fund-industry trade group, the Investment Company Institute, came out with its own
denunciation of the Labor Department proposal on Wednesday. The organization represents asset managers such as the Vanguard Group Inc., BlackRock Inc. and Fidelity Investments.
“The questions posed by Department of Labor about a so-called 'low-cost, high-quality' exception are hopelessly vague," said ICI general counsel David Blass in an emailed statement. "DOL simply has not provided enough information for us to know what they have in mind with those questions. We would have deep concerns, though, if DOL contradicts its long-held position that cost is not and cannot be the sole factor in choosing an investment."
Labor Department spokesman Michael Trupo did not respond to a request for comment. But the agency has previously said it's committed to move forward with the safe harbor and to collect feedback on how to make the provisions work through the ongoing public comment period.
Under its proposal, firms would be allowed to compensate brokers with commissions and other payments that come from companies that sell investment products.
But they could only advise on tax-sheltered savings, such as the popular 401(k) and individual retirement accounts used by employees, if they can demonstrate they are acting in accordance with standards that place the interests of clients first. Among other things, they would have to adopt policies to prevent harm from conflicts of interest and receive “reasonable” levels of compensation. Broker-dealers have said those requirements
expose its firms and brokers to excessive legal liabilities.
Under a “low-fee exemption,” brokerage firms that sell favored products would be allowed to sidestep some of those requirements “without satisfying some or all of the conditions.”
