White House Memo Offers a Peek at DOL Fiduciary Strategy

The two White House advisors state that academic research supports DOL's argument that the current consumer protections for investment advice in the retail and small plan markets are "inadequate" and that the current regulatory environment under ERISA "creates perverse incentives" that cost retirement savers billions of dollars.

The main culprit of these costs, they argue, arise from the incentives financial advisors are given that "encourage savers to move from low-cost employer plans to often higher fee IRA accounts, and from incentives to steer savers into higher cost products within the IRA market." Many firms have organized themselves on the basis of capturing "conflicted payments rather than the delivery of high-quality financial advice," the memo states. "With brokers advising on approximately $2.8 trillion of IRA assets — even more if employer retirement plan assets are included — the scope for harm to investors is large."

Conflicted advice results in losses of roughly $6 billion to $8 billion per year (35 to 50 basis points) for IRA investors, the memo states.

An investor receiving conflicted advice who expects to retire in 30 years loses at least 5% to 10% of his or her potential retirement savings due to conflicts, the memo states, or approximately one to three years' worth of withdrawals during retirement.

The current regulatory environment, they say, also allows fund sponsors and advisory firms "to create incentives for their advisors to recommend excessive churning (repeated buying and selling) of retirement assets and to steer savers into higher cost products with financial payoffs for the advisor."

But Jon Henschen of the broker-dealer recruiting firm Henschen & Associates states that "you just don't see [churning] anymore" because "these reps largely have been weeded out of the industry." Reps who still do so, he says, "are using fee accounts and only get the flat fee." Churning "is an issue from five to 10 years ago, not today."

The memo also states that advisors are steering clients into variable annuities and other "complex" products that charge higher fees. "Some reps put client funds in variable annuities for the living benefits, which protect clients' downside risk," argues Henschen. "In other words, sometimes added expenses are a good thing, if they give clients insurance in the form of downside protection."

Of course, the DOL redraft, which is said to reach the Office of Management and Budget any day now, still must go through a 90-day review by OMB. DOL will seek public comment on the measure and has said it will conduct a hearing on it.

Senate Majority Leader Orrin Hatch, R-Utah, has already vowed to torpedo DOL's fiduciary efforts for IRAs via his Secure Annuities for Employee (SAFE) Retirement  Act, which he said Congress will take up this year. But DOL fiduciary rule advocates maintain that challenges to kill DOL's fiduciary redraft in Congress will not survive a presidential veto.

– Janet Levaux contributed reporting.

— Check out Time for Broker Crackdown as Abuses Cost Retirement Savers Billions: Obama Aide on ThinkAdvisor.