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The Obama administration has proven exceptionally talented in making law without Congress, using the vast alphabet soup of agencies such as the EPA, the IRS, the FCC, and the NLRB to drastically increase the government’s reach into our lives. Among all of the massively damaging regulations coming out of these agencies is a little-noticed rule from the Department of Labor that could drastically affect millions of Americans’ choice in IRA and 401K investments.
Given this rule’s potential to greatly limit choice and increase the costs of workers’ retirement investments, John Berlau of the Competitive Enterprise Institute has appropriately dubbed it “ObamaCare for Your IRA”.
The thrust of this regulation is that you, the consumer, can’t be trusted to make your own choices in investment advice. Actually, this lack of trust in your common sense is not just implied, it is stated explicitly. As Berlau notes, “On page 4 of the proposed regulation, DoL expresses the view that “seldom” can Americans “prudently manage retirement benefits on their own” and that they “generally cannot distinguish good investments from bad.”
Enter the Obama administration, to protect the befuddled masses from themselves.
Registered investment advisers who actually manage and provide routine advice on IRA and 401k retirement plans are bound by a “fiduciary” standard, meaning that they must place their client’s interests above their own when recommending investments and disclose potential conflicts of interest that may lead to them peddling a particular product. This new regulation, however, would apply that same fiduciary standard to a much wider range of financial professionals, even including custodians of self-directed IRAs.
Many of the non-registered brokers and dealers this regulation would affect cater to smaller investors, and many supplement their income by taking fees from mutual funds and other asset companies in exchange for hawking their products. The upside of this practice is that it allows them to charge lower rates to their customers, giving access to these investments to a wider range of customers. These brokers are required to disclose their potential conflicts of interest already, meaning that customers can make their own choices as to the wisdom of trusting their sales pitch. The alternative to this model is that these brokers would charge higher fees, or move over to a registered investment adviser role that would likely force them to raise the minimum level of investment in their products. Both of these results would price many Americans out of their products.
Even more troubling is how this would affect custodians of 401ks managed directly by the investor or self-directed IRAs, which allow investors to invest in non-conventional assets such as precious metals or real estate. Even though these funds are being managed by the investors themselves, the IRS requires that they be under the management of a separate custodian. If these custodians are designated to hold fiduciary responsibility, the government will be able to more heavily regulate the types of investments that can be made with these accounts. They would be held liable for unapproved investments, even though their clients are making choices for themselves. This would certainly lead to fewer investment options being available for these types of retirement accounts.
Making investing for your retirement more expensive and reducing consumer choice - the Obama administration's modus operandi remains the same whether they're tackling health care or your retirement accounts.
The comment period for this rule ends on July 21st, and if you are concerned about the government’s invasion of your choice in investments, you can let them know your concerns by leaving a comment with the Department of Labor below: