Labor Secretary Tom Perez unveiled the Department’s plan to address conflicts of interest by brokers when offering retirement advice. The best interest investor contracts are meant to address problems with brokers steering customers to high-fee products when alternatives better address their client’s financial needs.
The best interest contracts require brokers to pledge they are upholding the best interests of their clients and put their clients’ best interest ahead of their own personal gain when recommending investments for 401(k) plans. Clients would be able to enforce a breach through a private right of action. The IRS could also impose an excise tax on transactions recommended because of a conflict of interest.
President Obama urged the Department of Labor to act on this issue in February when he said that billions of dollars are drained from retirement savings every year on hidden fees. A change to the current standard toward a fiduciary duty has been under consideration for about five years. In 2011, the DOL decided to table their proposal due to widespread industry criticism.
The Securities and Exchange Commission is also considering changes to unify the fiduciary standard among brokers and investment advisors, according to SEC Chair Mary Jo White. The industry has previously criticized changes that would impose different standards by different regulators. The Department of Labor regulates retirement account brokers. The SEC regulates other investment brokers.