Those fighting for 401(k) and pension reform now have a powerful ally: President Barack Obama, who recently announced new protections for retirement accounts that would, in part, require advisers to meet a higher standard.
The so-called fiduciary standard, which comes on the heels of an administration-led push for new 401(k) fee disclosure requirements in 2012, has met with stiff resistance from securities firms and advisers. Although regulators and champions of retirement savings reform argue that the new rules will protect plan members from paying exorbitant fees and bring the four-decade-old Employee Retirement Income Security Act more in line with current needs, opponents claim the changes will only limit savers’ choices by pushing service providers out of the game.
The debate heated up in February, when Obama and the Department of Labor endorsed the fiduciary standard. The main issue that the administration hopes to tackle is fees. Advisers are currently required to ensure that the 401(k) plans they recommend to clients are “suitable” for an investor; under the new rules, the plans would have to meet the tougher condition of being in the investor’s “best interest” and therefore worth the fees charged by advisers.
“If your business model rests on taking advantage, bilking hardworking Americans out of their retirement money, then you shouldn’t be in business,” Obama said at an event in Washington in late February hosted by nonprofit retiree advocate AARP. But it’s not just the criminals who will be affected by the new rules, and that’s part of the point: “Now outdated regulations, legal loopholes, fine print — all that stuff today makes it harder for savers to know who they can trust,” Obama added.
The proposed rules are only one piece of the Obama administration’s recent push for retirement benefit protection. Last year the DoL waded into a case now before the Supreme Court that could shake up the way 401(k) plan sponsors monitor the expenses and performance of the funds they select. The DoL filed an amicus brief in Tibble v. Edison International, a suit focused on the question of whether a 401(k) plan sponsor has the duty to constantly monitor the expenses of its funds. The department argued for the validity of ERISA claims for damage done by bad investment choices throughout the lifetime of a 401(k) plan. It’s the continued investment and payment of higher fees — not simply the initial plan choice, which is subject to a six-year statute of limitations — that causes damage, the argument goes.
“What separates this [from other 401(k) fee cases]...is the Obama administration telling SCOTUS, ‘We need you to put your stamp of approval on this fiduciary need to constantly monitor,’” says Brian Menickella, owner and managing partner at Beacon Group of Cos., a financial and retirement planning services firm based in King of Prussia, Pennsylvania. A decision favoring the plaintiffs (and the government) would benefit America’s workforce, Menickella adds.
No president before Obama has taken so much direct action on 401(k) fees. Why now? Echoing many retirement benefit reform activists, his administration points out that when ERISA passed in 1974, 401(k) plans didn’t exist. Since then “there has been a dramatic shift in our retirement system...today, workers are largely responsible for managing their own savings,” says a spokesperson. Obama has made it a priority to align the law with the new reality of retirement.
