Compliance Costs
Compliance costs for the industry would be $2.4 billion to $5.7 billion over 10 years, according to the Labor Department.
Shares of companies that offer 401(k) plans, including Principal Financial Group and Ameriprise Financial Inc., reversed losses Tuesday after the proposal was released.
Banks with large brokerage arms, including Bank of America Corp., Wells Fargo & Co., and UBS Group AG stand to be affected by the changes, according to RBC.
Brokers who pitch retirement plans to large employers may be exempt from the higher standards because the employers have experts who are obligated to look out for their workers’ best interest, according to a fact sheet distributed by the Labor Department. The exemption wouldn’t apply in cases where brokers sell 401(k) plans to smaller employers that lack the expertise to judge offerings, according to the fact sheet.
Sub-Par Advice
Perez has said that current rules allow brokers to get away with providing sub-par advice. The new protections would save investors $40 billion in avoided fees over 10 years, according to the Labor Department.
Instead of the current suitability standard -- a requirement that investments fit a client’s needs and risk tolerance -- brokers would have a fiduciary duty to recommend products that are in the best interest of customers.
Brokers could earn sales commissions and other fees that create conflicts of interest if they sign a “best-interest” contract with investors, Perez said. The contract would have to disclose fees or other incentives that might influence recommendations, he said.
IRA account holders would have a new right to sue financial advisers who don’t adhere to the best-interest standard, the Labor Department said.
The ability to sue advisers creates a “class-action right” that “will have a huge chilling effect on the willingness of people to be in this business,” said Kent Mason, a partner at Davis & Harman LLP who represents industry clients fighting the rule.
The proposed changes would cover the roughly $11 trillion held in 401(k) plans and IRAs. Labor’s existing rules don’t cover rollovers from 401(k)s to IRAs, which can result in higher fees for investors and the need to sell assets, according to regulators.
Brokers Selling IRAs Face Tougher Rules In Obama-Backed Plan
April 15, 2015
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