Congress wants to make your retirement worse.
That’s not what House Republicans are saying, of course. Our elected representatives are trying to save our retirement, they claim. Americans are under threat from “a government scheme,” as Rep. Phil Roe of Tennessee put it—one that will likely “intimidate the new investors” and “discourage them from saving,” according to Rep. Virginia Foxx of North Carolina. The threat is so severe, “we are at war,” roared Missouri Rep. Ann Wagner last month in an appearance before an insurance brokers convention.
Don’t believe it.
All this hyped-up, martial verbiage involves an ongoing attempt by the Department of Labor and the Obama administration to expand something known as the fiduciary standard, the legal requirement that financial advisers and brokers put your best interests ahead of their own, to cover retirement accounts.
The United States, it is generally agreed, is on the verge of a retirement crisis. According to the Center for Retirement Research at Boston College, a majority of households headed by someone aged 59 or younger are in danger of suffering from falling living standards in retirement. The slow phase-out of private-sector pensions and their replacement by such do-it yourself vehicles as 401(k)s and individual retirement accounts did not turn us into a nation of economic winners as promised but instead left all too many Americans woefully financially unprepared for the end of their working lives.
Yet according to a study released earlier this year by the White House Council of Economic Advisers, conflicted retirement advice is costing us $17 billion annually. We need every penny we can get, and the financial services industry is siphoning them off. How could that happen?
This gets technical, so bare with me for a few paragraphs while I explain.
When you seek professional financial advice, you almost certainly believe anyone you contact has a duty to act in your best interests, that they need to adhere to the financial equivalent of a Hippocratic oath, that they need to put your interest first and never do harm.
That’s not true. The majority—probably around 80 percent—of people who describe themselves as financial advisers or retirement experts or trusted college advisers adhere not to the fiduciary standard but to something called the suitability standard when they tell you what to do with your funds.
Let’s pretend this story involves medicine. Imagine that you go to the doctor and discover you have high blood pressure. The doc working to the fiduciary standard would need to thoroughly evaluate your medical situation and then recommend the best pill for your condition and budget, the one that does the most for you while causing the fewest side effects. He might, in fact, not suggest a pill at all but recommend you go on to work with a dietician. But the medical provider working to the suitability standard? She could suggest a pill that works almost as well but is more expensive than the others and one that gives her a kickback for prescribing it. And no, she would not need to tell you that there is something or someone else out there for you. The advice would be suitable, right?
In fact, that does sometimes occur in the medical industry. But we are horrified when we find out. Exposés are written. But when it comes to retirement or brokerage accounts, it’s all in a day’s business.
The financial services firms are claiming the increased consumer protection offered by the fiduciary standard is so costly they couldn’t afford to give advice to small investors, and they would need to jettison them. This is almost certainly nonsense. A 2013 analysis of an earlier version of the Department of Labor’s fiduciary proposal by the Center for Retirement found expanding the best-interest standard to cover IRAs would result in only a “modest” reduction in fees to brokers, one unlikely to force them to drop any clients.
The truth is that the financial services industry has an interest in the $7.4 trillion in our IRAs, and no, it is not a fully benevolent one. After all, this is almost certainly how your financial adviser is making a good living turn into an even better living.
As the Dodd-Frank regulations force banks to engage in less risky lines of business, what’s known as wealth management—advising you and me on our money—is making up a bigger and bigger part of many financial institutions’ bottom lines. According to Investment News, for example, Morgan Stanley’s wealth management unit was responsible for 42 percent of the firm’s profits in 2014, up from 35 percent from 2009.
These wealth divisions pitch themselves to baby boomers on the verge of retirement, all but begging them to move their money out of their former or soon-to-be former employers’ 401(k)s and into IRAs, an action called a rollover. While the financial industry claims this will allow consumers a greater breadth and variety of options than available in their 401(k), the truth is that the costs to consumers are higher and the protections for them lower in IRAs than in their employers’ 401(k).
And financial advisers are rewarded for their efforts by the financial services industry. As Sen. Elizabeth Warren pointed out recently, annuity sellers—who are often marketing to middle-aged and elderly consumers whose money is held in IRAs—rarely tell their customers about the trips to places like the Hard Rock Resort and Casino, Punta Cana, in the Dominican Republic that companies like Magellan Financial & Insurance Services will give insurance brokers and financial advisers in return for achieving certain sales goals.
This sort of broker income enhancement would almost certainly be scaled back under a fiduciary standard. It would be hard, after all, to explain how things such as sales quotas, bonuses, and Caribbean vacations designed to get financial advisers, stock brokers, and insurance agents to steer clients to one financial firm or product over another are in any investor’s best interest.
And one other thing not in your best interest?
“It is much harder to recommend a rollover under a best-interest standard,” observes Barbara Roper, the Consumer Federation of America’s director for investor protection. “That’s the big money issue.”
So the financial services firms are also reaching out to your congressman or congresswoman, to, shall we say, explain their point of view. According to data collected by Open Secrets, the top two sectors in 2013–2014 responsible for donations to Ann Wagner, the representative who feels so passionately about the fiduciary standard she is willing to go to “war” over it, are the insurance and securities and investment industries.
Congress is reciprocating the love. Last month, Wagner threatened to “defund” any attempt by the Labor Department to move forward with the fiduciary standard. Guess what turned up in an appropriations committee funding bill introduced in the House of Representatives this week?
Something else worth watching: So far, those leading the charge against the expanded fiduciary standard are Republicans, but that could change. When the Department of Labor pushed the issue a few years ago, a number of Democrats didn’t support it either.
Think about it this way: The financial services industry values your bottom line, but it values its own even more. And so, as a result, do many members of Congress.