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New rules set to make retirement industry more accountable


The $14 trillion retirement industry is about to undergo a major overhaul: Brokers for the first time will be forced to consider the best interest of their clients — rather than the brokers’ own fees — in recommending investments.

The US Department of Labor announced the new rules, the first in decades, on Wednesday, after banks, insurance firms, and mutual fund companies spent millions furiously lobbying against them.

Massachusetts Senator Elizabeth Warren, who pledged her support for the tighter rules more than a year ago and joined President Obama in drumming up support for them among consumer groups, called it an “enormous victory” for working families.


It’s also a victory for the Democratic senator, a firebrand on financial regulation who has aimed her substantial political voice at banks, investment houses, and now financial advisory firms.

“Hard-working Americans need every dollar to work for them, not to lose billions of dollars to investment advisers who are watching out for themselves instead of for their clients,” Warren said. “Today the rules begin to change.”

The rules will legally require companies and financial advisers to act in their customers’ best financial interest, potentially saving them money in fees. The rules will be phased in, starting next April, federal officials said, and fully implemented by January 2018.

For consumers, the most immediate change may come when they decide to roll over their 401(k)s into IRAs. An adviser would need to provide information and disclosures about the types of investments he or she is recommending, as well as any commissions or perks tied to the recommendation, said Alicia Munnell, the director of Boston College’s retirement center.

Ultimately, it will discourage advisers from pushing those higher-cost products, Munnell said.

“It really changes the nature of the conversation,” she said.

The retirement landscape has changed over the last decades, with company pensions disappearing and more people responsible for building their own retirement savings. As a result, stricter standards are needed to provide a greater measure of retirement security, US Labor Secretary Thomas Perez said during a press conference Wednesday.


Combined, 401(k)s and individual retirement accounts hold $14 trillion in private retirement assets, compared to about $3 trillion in traditional pensions, according to the Investment Company Institute.

“When your doctor and when your lawyer are talking to you, they’re obligated to look out for your best interest and despite what most working people assume, that’s not necessarily the case for financial advisers,” US Labor Secretary Thomas Perez said during a press conference Wednesday.

In unveiling the final version of the rules, regulators made several concessions to the financial services industry, including more time to implement the regulations and fewer restrictions on the investments they can sell.

Companies will have to make fewer disclosures than originally proposed in earlier versions of the regulations; advisers won’t be penalized for pushing their company’s own mutual funds; and firms can sell a broader range of investments, including certain real estate trusts.

Also left out of the final version of the rules is any requirement that advisers provide performance projections for one-, five-, and 10-year periods. And advisers to businesses that provide 401(k) plans with less than $50 million in assets have also received a carve-out to the tighter rules.

“We feel comfortable that this is something that is a workable,” said Mark Casady, chief executive officer of Boston-based LPL Financial LLC, one of the nation’s largest financial advisory companies. “They have made a lot of modifications that we thought needed to happen.”


Even with the concessions, the changes will help consumers, said Dennis Kelleher, president of the Washington-based Better Markets Inc., a nonprofit, nonpartisan financial reform group.

“That is a dramatic and incredibly important change to millions of Americans,” Kelleher said.

Regulators and consumer advocates have been concerned that investors were being steered into high-fee or high-risk funds that eat into their retirement savings because brokers are paid commissions and earn perks, such as Caribbean vacations, for selling these products. The advocates argue that investors are placed in high-cost investments even when less expensive options are available, because the brokers earn more. The Labor Department estimates that consumers lose $17 billion a year due to excessive fees.

The new requirements will have an impact on some of the largest financial services firms in Massachusetts, including Boston-based Fidelity Investments and Massachusetts Mutual Life Insurance Co. in Springfield.

In a statement Wednesday, MassMutual said it’s concerned about the unintended consequences of the rule. Some in the industry have argued that brokers might abandon moderate-income customers for fear of lawsuits from unhappy clients as a result of the regulations.

“It will hurt Americans at the worst possible time — a time when they need to take more accountability than ever for their financial future,” MassMutual said.

Brokers and financial firms have also argued that they already put their clients into low-cost investments and that these regulations create burdensome paperwork and make it more difficult to provide simple and routine help to investors.


Fidelity is reviewing the finalized rules, said Steve Austin, a company spokesman. It did not take a firm position on the final version Wednesday.

“We support rules that protect and don’t hinder workers saving for retirement,” Austin said.

Rokhaya Cisse, an analyst with Moody’s Investor Services, said that under the new rules, brokers will likely charge fees, instead of relying on commissions pegged to their sales of the investment products, although it’s unclear if that could end up costing consumers more. Commissions and revenue-sharing payments will still be allowed, but the adviser has to sign a legal contract with the investor disclosing potential conflicts and committing to putting the client’s best interest first.

As companies and investors look to shave costs, analysts also expect robo-advisory services, where an algorithm helps guide investments based on a consumer’s risk appetite and goals, to grow. The robo-advisers can be a lower-cost option for consumers and firms and many money managers are investing in the technology.

Last week, Fidelity announced that it had launched a pilot of its online investing platform for smaller investors that charges annual fees of 0.35 percent of an IRA account.

While these new rules come with some additional costs initially, larger firms are likely able to absorb them and are already shifting their focus and products to meet the new requirements, Cisse said.


Deirdre Fernandes can be reached at deirdre.fernandes@globe.com. Follow her on Twitter @fernandesglobe.