(Bloomberg News) Brokerage firms may drop millions of individual retirement account holders if a proposed U.S. Labor Department rule takes effect, a lobbying group said today.
The Labor Department wants to expand the scope of fiduciary responsibility to protect those saving for retirement from conflicts of interest, such as recommending investments with higher fees. The rule would require investment professionals who advise employers and workers with retirement savings plans such as 401(k)s or IRAs to act in the best interest of their clients.
The change may cause financial firms to offer fewer investment options in retirement accounts and shift to a fee- based model used by investment advisers, which may increase costs, Kenneth Bentsen, executive vice president for public policy and advocacy at the Securities Industry and Financial Markets Association, said at a Washington hearing before the House Subcommittee on Health, Employment, Labor and Pensions.
"Most firms require a minimum account balance for advisory accounts that could result in millions of IRA account holders being dropped," Bentsen said in written testimony. There are more than 7 million IRA accounts with balances under $25,000 that are commission-based, according to Sifma, a lobbying group for banks and brokerages.
Employers generally are held responsible for making sure their retirement plans operate in the best interest of employees. The proposed Labor Department regulation would apply a fiduciary standard to firms that advise plan sponsors and investors about investments even if they don't give that advice regularly.
Turning Off Business
"It's not about raising the standard, it's about turning off whole lines of business," Jim McCarthy, managing director of wealth advisory solutions at Morgan Stanley Smith Barney in Purchase, New York, said in a telephone interview.
If firms are considered fiduciaries by the Labor Department, selling investors bonds from a brokerage's inventory or recommending a trade that would generate a commission may be considered a conflict of interest and a "prohibited transaction," said McCarthy. Morgan Stanley Smith Barney manages about $430 billion in retirement assets, he said.
"I think the industry is not exaggerating when they say they will abandon this business," Barbara Roper, director of investor protection for the Consumer Federation of America in Washington, said in a telephone interview.
Improved regulation of retirement plans is needed because employers and participants may not understand that the person educating them about their investments may have a financial stake in the choices they make, the U.S. Government Accountability Office said in a report released in February.