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BREAKINGVIEWS-Uncle Sam puts $740 bln pension industry in a spin

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

By Gina Chon

WASHINGTON (Reuters Breakingviews) – The U.S. Labor Department has thrown the $740 billion pension business for a loop. The agency unveiled new rules on Wednesday that will force brokers to put client interests first. That’s good news for retirement savers. Firms that have large offerings of low-cost products could also benefit. But those with large annuities businesses could bear the brunt of the $17 billion in fees the DoL estimates may be lost.

Consumers considering putting put money into Individual Retirement Accounts and other investments are often overwhelmed by the number of options presented to them. Advisers who earn higher fees or commissions by steering clients into certain products complicate the picture. The new rules aim to eliminate these investor headaches by requiring more disclosures and having brokers sign a best-interest contract in certain circumstances.

The measures favor products that have lower costs. These include passive investments, like index-mutual funds or exchange-traded funds, which already meet the terms of the latest criteria. That means BlackRock, Vanguard and other firms which do a lot of business in these products won’t have to do much, if anything, to comply – they may even win new business.

Brokerages that derive a lot of revenue from commissions are likely to suffer. These are often regarded as skewing brokers’ incentives, which is why the new rules frown on them. Merrill Lynch already operates largely under a fee system, which should help it weather the new rules better than competitors. One of them, Edward Jones, has already launched a program for low-cost accounts focusing on passive investments in response to the measures.

Big annuity players are also in the DoL’s crosshairs. Variable annuities produce high commissions so are not exempt from the client best-interest contract. That will hit firms like Allianz Life and Fidelity. AIG, another big player in annuities, said the Labor rules are one of the reasons why it was selling its brokerage business.

The government offered some concessions on the original plans it has been working on for years and first outlined in 2015 but the new measures still increase the overall regulatory burden on the pensions industry. So the Chamber of Commerce may yet proceed with the lawsuit it has long been threatening. And if the unlucky companies do end up suffering a drop in revenue, they’re likely to find ways to pass that onto their clients.

CONTEXT NEWS

– The U.S. Labor Department on April 6 released its fiduciary-duty rule requiring brokers to have their client’s best interest in mind when giving investment advice on 401(k) plans and other retirement programs. Previously, brokers only had to provide “suitable” suggestions, which the Obama administration said led to recommendations that put the adviser’s financial interests first. The government estimates the new rules could save consumers up to $17 billion a year in high fees and commissions.

– The broker industry has argued that the new rules are unnecessary and will increase costs for their customers. The U.S. Chamber of Commerce has said it could file a lawsuit against the measure. The Securities and Exchange Commission has also vowed to put forward its own fiduciary-duty rule, saying such issues are part of its jurisdiction.

– The Labor Department had to drop its initial proposal in 2011 after criticisms from the industry and Congress.

– Labor Department release: http://1.usa.gov/1SAgk2v

(On Twitter https://twitter.com/GinaChon Editing by Antony Currie and Martin Langfield)

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