While brokers’ recommendations for 401 plans and other retirement accounts must currently be suitable, they don't have to be in an investors’ best interest.

The idea is therefore to reduce conflicts of interest and “hidden fees,” protecting investors from retirement investments that produced high commissions for brokers but low returns.

The proposal, which has sparked heated discussions in the financial services sector and political world, is now with Office of Management and Budget, where it will undergo agency review for up to 90 days. 

It is part of what is already an extremely intense debate over the fiduciary obligations of broker-dealers. 

“This is an exciting and historic day for all Americans who save in retirement plans,” said Kathleen McBride, chairman of The Committee for the Fiduciary Standard. “Americans have $3.1 trillion in traditional pensions, $5.3 trillion invested in 401-type plans and $7.2 trillion in IRAs.”

“It is more important than ever that retirement investors receive advice that is in their sole interest. Retirement investors are captive in their company’s plan – they cannot choose to go to a different plan unless they leave their company. It is crucial that advice to both retirement plans and investors is in beneficiaries’ sole interest,” McBride added.

The National Association of Plan Advisors has, however, described the proposal as an “attack” on many advisors.

Indeed, “people should be protected from unfair and deceptive practices,” said Brian Graff, executive director of NAPA. “But all indications are that this rule will block Americans from working with the financial advisors and investment providers they trust simply because they offer different financial products — like annuities and mutual funds — with different fees.”

Graff continued: “The best way to address concerns about 'hidden' fees is through better transparency, not by blocking 401 participants from working with the advisor of their choice. If the administration moves forward with this proposed rule, American savers will be forced to pay out-of-pocket for their financial advice, or be limited to financial products with identical fees.”

NAPA added that a previous version of the regulation was withdrawn in 2010 following criticism of its potential impact on access to professional investment advice, particularly for lower- and middle-income workers.

Obama's speech

At an event hosted by the AARP, President Obama said that, on average, conflicts of interest in retirement advice results in annual losses of 1 percentage point for affected persons. 

“I know 1 per cent may not sound like a lot, but the whole concept of compounding interest - it adds up,” he said.

“There are a lot of very fine financial advisors out there, but there are also financial advisors who receive backdoor payments or hidden fees for steering people into bad retirement investments that have high fees and low returns.  So what happens is these payments, these inducements incentivize the broker to make recommendations that generate the best returns for them, but not necessarily the best returns for you.”

President Obama added: “I want to emphasize once again, there are a whole lot of financial advisors out there who do put their clients’ interests first.”