On Wednesday, the Labor Department plans to unveil new regulatory restrictions against brokers, insurance agents, and other who service 401(k)s and individual retirement accounts (IRAs). That means less access to financial advice and fewer options for a secure retirement for middle class investors. Who thought that was a good idea?
The Obama administration thinks people aren’t smart enough to seek out and discern good investment advice. When the Labor Department first proposed its so-called fiduciary rule last April, it explained that individuals cannot “prudently manage retirement assets on their own,” and that they “generally cannot distinguish good advice, or even good investment results, from bad.” That paternalism was the administration’s justification for some pretty draconian restrictions.
The rule puts a big burden on professionals who service 401(k) plans and IRAs by re-defining them as “fiduciaries.” All of a sudden, a broad swath of financial professionals will have to satisfy government regulators that they are serving the “best interest” of savers when providing investment guidance. That may not adversely impact wealthy savers and investors, but the cost and risk of compliance may make it not so worthwhile to service smaller accounts, as happened in the United Kingdom when third-party commissions were banned.
Middle-class savers may suffer an estimated $80 billion in lost savings from a government-caused “guidance gap,” according the center-left economists Robert Litan and Hal Singer. Brokers would have to charge investors more, as the DOL rule creates a presumption against brokers taking third-party commissions from mutual funds. Investors who now pay only a small commission may have to pay a much larger fee based on a percentage of their assets.
Other sources of investment advice may be curtailed. The rule would ensnare financial professionals who provide even one-time guidance or appraisal of investments. That could even include radio talk show hosts who talk about investing, like Suze Orman and Dave Ramsey.
Congress can take action against the Labor Department’s fiduciary rule. Members of Congress from both parties already expressed serious concerns about the rule. In September, 96 House Democrats wrote to the agency expressing concern about the rule’s effects on consumer choice and access to advice and the potential for low-income savers to lose access to vital financial services.
When the rule comes out this Wednesday, Congress should take steps to block or delay its implementation—defunding it, voting it measure down, and/or rewriting the law to preclude such a rule.
For more information, check out my FAQ on the fiduciary rule.