How stricter rules for brokers will affect retirement savers

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

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

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.

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.

[...] they can't, for example, pitch penny stocks or real estate investment trusts to an 85-year-old woman living on a pension.

[...] 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.

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.

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.

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.

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.