‘Massive Shift’

A White House official said the document, titled “Draft Conflict of Interest Rule For Retirement Savings,” shouldn’t be seen as a new turn in the Labor Department’s rulemaking. That process, the official said, would include a comment period if the administration moves forward. The Labor Department last year indicated that its proposal could come as soon as this month.

The Labor Department has pressed to update the rules, which were issued in 1975. At that time, many workers had employer-controlled pensions and the 401(k) didn’t exist. Now, tens of millions of people hold their savings in 401(k) plans and individual retirement accounts, known as IRAs, which together hold more than $11 trillion.

“Few foresaw the massive shift in retirement savings that would occur over the next 40 years,” Furman wrote.

The memo cites research showing that some practices, such as boosting commissions with excessive trading, cost investors $8 billion to $17 billion a year. The document says the estimate is “quite conservative” and argues investors lose five to 10 percent of their long-term savings due to conflicted advice.

Clients’ Detriment

“Academic research has clearly established that conflicts of interest affect financial advisors’ behavior and that advisors often act opportunistically to the detriment of their clients,” the memo says. That includes the practice of brokers receiving payments for selling certain mutual funds.

Brokers generally charge commissions based on trading activity, which they have said is usually less costly than fees that are based on the size of an account. It would be more difficult to keep those commission-based accounts, the industry has said, if the fiduciary standard were imposed.

To compensate for additional paperwork requirements and an increased potential for lawsuits, the industry has argued that it would be forced to move investors to accounts that charge a flat fee. Savers with assets under $50,000 would probably be dropped, forcing investors to handle their own savings, industry groups have said.

Cause Concerns

The Securities Industry and Financial Markets Association, Wall Street’s largest trade group, declined to comment specifically about the memo. The group has previously said that opposing the Labor Department plan is one of its top priorities in Washington this year.

“Any signal that the DOL proposal is moving forward would cause us concern,” Andy Blocker, a Sifma lobbyist, said in a statement. “We have repeatedly said that action by the DOL runs the risk of increasing costs and decreasing access to education for the everyday consumer.”

The Labor Department’s draft rule won’t ban sales commissions, Furman’s memo says. The proposal will be a “middle ground” that requires brokers to guard against conflicts and avoid “certain self-dealing transactions,” the memo said.

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