DOL Rule Released

High fees. Conflicts of interest. Inappropriate investments.

The Obama administration is going after a host of perceived rip-offs with the new rules it unveiled Wednesday for brokers who recommend investments for retirement savers.

No longer will brokers who sell stocks, bonds, annuities and other products be required just to recommend investments that are "suitable" for a client. They'll now have to meet a stricter standard that has long applied to registered advisers: They will be considered "fiduciaries" — trustees who must put their clients' best interests above all.

The new rules, which will be phased in starting a year from now, follow intense lobbying by both consumer advocates and the financial industry. Full compliance will be required by January 2018.

At stake are about $4.5 trillion in 401(k) retirement accounts, plus $2 trillion in other defined-contribution plans such as federal employees' plans and $7.3 trillion in IRAs, according to the Investment Company Institute.

The administration has said investors will save about $4 billion annually under the new rules. The industry has countered that investment firms will have to shell out more than that just to comply with the rules. Financial firms also argue that the stricter rules will likely shrink Americans' investment options and could cause brokers to abandon retirement savers with smaller accounts.

Americans increasingly seek guidance in navigating their options for retirement savings. Many professionals provide advice. But not all are required to disclose potential conflicts of interest.

"This is a huge win for the middle class," Labor Secretary Thomas Perez said Tuesday in a conference call with reporters. "We are putting in place a fundamental principle of consumer protection."

Here are some questions and answers:

BROKERS? FINANCIAL ADVISERS? WHAT'S THE DIFFERENCE?

It's significant. Brokers buy and sell securities and other financial products on behalf of their clients. They also can provide financial advice, with one key stipulation: They must recommend only investments that are "suitable" for a client based on his or her age, finances and risk tolerance.

So they can't, for example, pitch penny stocks or real estate investment trusts to an 85-year-old woman living on a pension. But brokers can nudge clients toward a mutual fund or variable annuity that pays the broker a higher commission — even without disclosing that conflict of interest to the client.

Registered investment advisers, on the other hand, are "fiduciaries." In that way, they're more like doctors or lawyers — obligated to put their clients' interests even ahead of their own. That means disclosing fees, commissions, potential conflicts and any disciplinary actions they have faced.

Advisers must tell a client if they or their firm receive money from a mutual fund company to promote a product. And they must register with the Securities and Exchange Commission, thereby opening themselves to inspections and supervision.

WHAT DO THE NEW LABOR DEPARTMENT RULES DO?

They put brokers under the stricter requirements when they handle clients' retirement accounts. The Labor Department has grappled with the issue for years. The department withdrew an earlier proposal in 2010 amid an outcry from the financial industry, which warned that it would hurt investors by limiting choices.

The rules update the Employee Retirement Income Security Act, known as ERISA, enacted in 1975. That was a far different time. Traditional company pension plans were still the dominant source of retirement income. Now, traditional pensions are increasingly gone. In their place are 401(k)-type plans, which require workers to set aside pre-tax money but also add a new layer of risk: Employees themselves must decide how to invest their retirement money, and many seek professional advice.

WHAT ARE THE ARGUMENTS FOR AND AGAINST?

Consumer, labor and civil rights groups have pushed for the new rules. They say the current system provides a loophole that lets brokers drain money from retirement accounts in fees they receive that can tilt the investment advice they give clients.

Ordinary investors with relatively small balances in their retirement accounts could especially benefit from the changes, according to Barbara Roper, director of investor protection for the Consumer Federation of America. These are the people who are now most likely to get "a sales pitch dressed up as advice" from brokers, Roper says.

AND THE OTHER SIDE?

Wall Street lobbying groups, mutual fund companies, life insurance firms and other industry interests have opposed the rules as proposed last year and pushed the Labor Department to revise them.

They say the stricter requirements could limit many people's access to financial guidance and retirement planning and their choice of investment products. They warn that that would fall especially hard on mid- and low-income employees with smaller retirement balances — say, less than $50,000 — who could be abandoned by brokers.

The new requirement to act in a client's best interest means, in many cases, that the practice of charging commissions on every trade would be replaced by a set fee for a broker as a proportion of a customer's assets. Some brokers may decide that the smaller fees aren't worth their trouble, opponents say.

Some financial companies and groups may take the government to court over the new rules.