White House Move To Protect Nest Eggs Sparks Hopes And Fears

Feb 27, 2015
Originally published on May 14, 2015 12:58 pm

The Obama administration is creating new protections for Americans saving and investing for retirement, but industry groups say the new rules could hurt the very people the president says he wants to help.

If you're building a retirement nest egg, big fees are the dangerous predators looking to feast on it. The White House says too many financial advisers get hidden kickbacks or sales incentives to steer responsible Americans toward bad retirement investments with low returns and high fees.

"If your business model rests on taking advantage of bilking hard-working Americans out of their retirement money, then you shouldn't be in business," Obama said Monday. "That's pretty straightforward."

The White House is directing the U.S. Department of Labor to craft new rules that require retirement advisers to put consumers' best interests ahead of their financial gain. But some industry groups are sounding the alarm.

"A sledgehammer is not needed where a regular hammer would fix the problem," the Financial Services Roundtable said in a statement.

Tim Pawlenty, the group's president and CEO, has another metaphor at the ready.

"There's always a few bad apples," says Pawlenty, the former Minnesota governor. "We would encourage focusing on bad apples and removing them, instead of tipping over and smashing the whole apple cart."

Pawlenty says that he hasn't seen details of the new rules yet, but that if the rules create burdensome regulation, financial planners might decide it's not worth working with people of modest means.

"We don't want to get to a point where the red tape and bureaucracy and cost freezes lower-income people from being able to take advantage of financial planning advice," he says.

But not all industry groups are so worried.

"There's a lot of overheated rhetoric," says Kevin Keller, CEO of the Certified Financial Planner Board, a voluntary standards group that certifies financial planners.

He says he supports what the White House is trying to do. The new rules would create what's called a "fiduciary standard," which is a requirement to act in a client's best interest.

Some industry groups claim that the fiduciary standard will reduce the availability of financial advice for middle-class Americans, but Keller says that's not true. Still, everything depends on the actual language in the rules.

Kent Smetters, a Wharton School economist who served in the George W. Bush administration, says he supports the move by the White House. But he's also frustrated by existing regulations.

For example, he says, while some financial planners already are held to a fiduciary standard, they have found a loophole: By getting registered as both a financial planner and a stockbroker, they can still get commissions for steering people into bad investments with high fees.

"Literally, this is legal," Smetters says. "I could say to you, 'Chris, I have your best interests in mind, I think you should invest in this fund X, Y, Z.'

"That first half of the sentence, I really had your best interests in mind," he adds. "The second half of the sentence, I take off my fiduciary hat, and you don't know any better because after all you're going there for is advice. You don't have a clue. It's just screwing over middle-class households."

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Transcript

LINDA WERTHEIMER, HOST:

The Obama administration is working on new protections for Americans who are saving and investing for retirement. Now some in the industry are pushing back. They say new rules could backfire and actually hurt the very people the president says he wants to help. NPR's Chris Arnold reports.

CHRIS ARNOLD, BYLINE: If you're building a retirement nest egg, big fees are your enemy. They are the birds of prey circling above you, looking to feast on your egg. And the White House says too many financial advisers are making that happen. That's because they get hidden sales incentives to steer Americans into bad retirement investments with high fees and lower returns. Earlier this week, President Obama put it this way.

(SOUNDBITE OF ARCHIVED RECORDING)

PRESIDENT BARACK OBAMA: If your business model rests on taking advantage, bilking hard-working Americans out of their retirement money, then you shouldn't be in business.

(APPLAUSE)

OBAMA: That's pretty straightforward.

ARNOLD: The Labor Department will craft the new rules. The goal is to require retirement advisers to put your best interests ahead of their financial gain. But some industry groups are sounding the alarm. The Financial Services Roundtable said in a statement, quote, "a sledgehammer is not needed where a regular hammer would fix the problem." Tim Pawlenty is the group's president, and he's ready with another metaphor.

TIM PAWLENTY: There's always a few bad apples. We would encourage focusing on identifying those bad apples and removing them as opposed to, you know, tipping over and smashing the whole apple cart. And so we're concerned that this rule might be overly broad in that regard.

ARNOLD: For all the sledgehammers and smashed apples though, Pawlenty acknowledges that he doesn't know if the proposed rules would do that because we haven't actually seen the details yet. But Pawlenty says if the rules create burdensome regulation, financial planners might decide that it's just not worth working with people of modest means.

PAWLENTY: We don't want to get to a point where the red tape and the bureaucracy and the cost freezes lower income people from being able to take advantage of financial planning advice.

ARNOLD: But actually, not all industry groups are so worried.

KEVIN KELLER: There's a lot of overheated rhetoric.

ARNOLD: Kevin Keller is the head of the Certified Financial Planner Board, a voluntary standards group that certifies tens of thousands of financial planners. And actually, Keller says, he supports what the White House is trying to do. The new rules would create what's called a fiduciary standard, a requirement to act in a client's best interest.

KELLER: The claims by some industry groups that the fiduciary standard will reduce the availability of financial advice for middle Americans, it's simply just not true.

ARNOLD: Still, everything depends on the actual language of the rules. Kent Smetters is an economist with the University of Pennsylvania's Wharton School. He served in the George W. Bush administration, and he too supports the move by the White House. But he's also frustrated by existing regulations. For example, stockbrokers are already held to a fiduciary standard. But he says the brokers have found loopholes. So he says they can still get commissions for steering people into bad investments with high fees.

KENT SMETTERS: Literally, this is legal. I could say to you, Chris, you know, I have your best interest in mind, comma, I think you should invest in this fund, X Y and Z. That first half of the sentence, I really had your best interest in mind. The second half of the sentence, I take off my fiduciary hat.

ARNOLD: And at that point, he says, the broker could sell you whatever he or she wants.

SMETTERS: And you don't know any better because after all, you're going in there for advice. You don't have a clue. It's just screwing over middle-class households.

ARNOLD: But whether the new rules will be strong enough to actually fix problems, or so overly burdensome that they create problems, or just weak and meaningless, we won't know until the proposed rules are made public and eventually finalized. Chris Arnold, NPR News. Transcript provided by NPR, Copyright NPR.