(Bloomberg) — President Barack Obama threw the weight of
the White House behind an effort that would make it harder for
brokers to push higher-fee mutual funds or other expensive
products on people saving for retirement.

The plan to be issued by the Labor Department would require
brokers to act in a customer’s best interest, a change that
could limit the earnings of financial advisers in the handling
of Americans’ $11 trillion of retirement savings.

The president said the current regulations are out of date,
devised in the era when most Americans could count on a
traditional pension from employers. Through self-directed
retirement accounts, some brokers are skimming significant sums
annually from small investors, he said.

“Financial advisers absolutely deserve fair
compensation,” he said in remarks Monday to AARP, the nation’s
biggest lobby for retirees. “But they shouldn’t be able to take
advantage of their clients.”

40-Year-Old Rules

Obama’s involvement underscores the opposition the
government faces in revising 40-year-old rules that affect tens
of millions of baby boomers nearing retirement and younger
workers without pensions. Having beaten back previous efforts to
update the rules, Wall Street now has more at stake. Banks have
boosted their asset-management businesses after the 2008
financial crisis, while curtailing riskier and more capital-intensive trading units.

“There are some financial interests that are going to
fight it with all they’ve got,” Obama said.

The president promoted the Labor Department proposal at the
AARP event Monday along with U.S. Senator Elizabeth Warren of
Massachusetts, whose popularity has surged among Democrats based
on her claims that bankers and the financial industry too often
try to take advantage of workers.

Officials declined to outline specifics of the plan to
impose a standard known as a fiduciary duty on brokers, which
will crack down on “backdoor payments and hidden fees,”
according to a fact sheet issued by the White House.

Issues Distorted

Financial-industry groups say the Obama administration and
Labor Department have distorted the issue and disregarded
existing tough rules for brokers. Those measures are enforced by
the Securities and Exchange Commission and Financial Industry
Regulatory Authority.

The Labor Department planned to send the proposal on Monday
to the Office of Management and Budget for review, Labor
Secretary Tom Perez said on a conference call with reporters.

It could take several months before the rule is publicly
released, Perez said on the Sunday call, where he was joined by
Obama administration officials and John Bogle, the founder of
mutual-fund company Vanguard Group Inc. That step will allow the
securities industry, investor groups and lawmakers to comment on
the plan before the Labor Department can issue a final
regulation.

At the heart of the proposal is an effort to tighten the
legal standard for brokers handling retirement funds in
individual retirement accounts and 401(k)s, which now hold more
than $11 trillion. Under current rules, brokers can sell any
product that is “suitable” for an investor, meaning it fits
the client’s needs and tolerance for risk.

Broker Profits

Brokers typically earn money from upfront sales commissions
or fees paid by investors who purchase mutual funds. White House
officials said that kind of compensation arrangement provides an
incentive to recommend products that net higher fees or
commissions without yielding better returns for investors.
Clients lose as much as $17 billion a year from such conflicted
advice, according to the Obama administration.

“The corrosive power of fine print, hidden fees and
conflicted advice can eat away like a chronic illness at
people’s hard-earned retirement savings,” Perez said.

Investors are particularly vulnerable to conflicts of
interest when moving investments from an employer-sponsored
401(k) plan to an IRA, the White House said. That process allows
brokers to steer investors into products that earn them higher
fees. The average IRA rollover for investors between 55 and 64
years old in 2012 was more than $100,000, according to Jason
Furman, chairman of Obama’s Council of Economic Advisers.

IRA Investments

Former employees of companies such as AT&T Inc., Hewlett-Packard Co. and United Parcel Service Inc. have complained that
brokers persuaded them to roll their 401(k) plans into high-cost, unsuitable IRA investments, according to a three-month
Bloomberg News investigation published last June.

Subjecting brokers to a fiduciary duty, a standard that now
applies to professional money managers, will lead to more
lawsuits against the industry and add burdensome compliance
requirements, industry groups argue.

The added costs will probably prompt brokers to drop client
accounts with less than $50,000 of assets, leaving those
investors to manage their own savings, according to the
Securities Industry and Financial Markets Association.

“We have ongoing concerns that the DOL and the White House
have completely ignored the existence of the robust regulatory
regime under SEC and Finra, and this re-proposal could make it
harder to save for retirement by cutting access to affordable
advice and limiting options for savers,” Sifma Chief Executive
Officer Kenneth Bentsen said in a statement. “The DOL re-proposal could ultimately raise the cost of saving and hurt all
Americans trying to save for retirement, particularly middle-class workers.”

When the Labor Department issued a fiduciary-duty proposal
in 2010, financial companies including JPMorgan Chase & Co. and
Fidelity Investments said it was overly broad and would cover
activities such as communications with call centers that process
routine questions from investors. Morgan Stanley questioned
whether selling investors bonds from a broker’s inventory could
have been prohibited by the earlier plan.

Congressional Republicans were also opposed, with the House
approving legislation in 2013 that would have blocked the Labor
Department from taking action.

Perez said the new rule will be “very different” from
previous versions and would spell out practices, such as sales
commissions and fee sharing, that would still be allowed.

“I’m confident we can actually do more to help the small
and moderate savers in the context of the proposal we will be
putting forth,” he said.

To contact the reporters on this story:
Dave Michaels in Washington at
dmichaels5@bloomberg.net;
Angela Greiling Keane in Washington at
agreilingkea@bloomberg.net

To contact the editors responsible for this story:
Jesse Westbrook at
jwestbrook1@bloomberg.net
Joe Sobczyk