September 19, 2011 / 9:00 PM / 8 years ago

UPDATE 1-Labor Dept. bends on 401(k) rule, insurers cheer

* US agency will repropose plan for a fiduciary standard

* IRA advice will likely be included in reproposal

* Bipartisan legislators pushed for pullback

(Adds details about upcoming proposal, industry reaction)

By Suzanne Barlyn and Jessica Toonkel

Sept 19 (Reuters) - The U.S. Department of Labor on Monday withdrew a controversial proposal to subject financial professionals to a higher standard of care when advising companies on their retirement plans.

The Labor Department, which has jurisdiction over retirement plans, said it will repropose the rule early next year. As currently written, it would have imposed a fiduciary standard that requires brokers and other advisers to put their clients’ interests first as opposed to merely providing suitable advice.

But a new proposal, expected from the agency in early 2012, will likely include advice about individual retirement accounts under the fiduciary definition, a Labor Department spokesman told Reuters on Monday.

Industry groups argued against including IRAs in the most recent proposal, because doing so would restrict brokerages from collecting commissions without extensive disclosure. The groups argued that would make financial advice less accessible to Main Street investors.

The initial proposal drew darts from numerous lawmakers, insurers and securities industry lobbying groups, including the National Association of Insurance Financial Advisors and the Financial Services Institute who feared their salespeople would have to limit the products they could suggest for retirement plans.

Various groups argued that retirement plan participants would see investment costs rise under the standard. They also said the Labor Department proposal would likely conflict with a separate fiduciary rule that the Securities and Exchange Commission is planning to govern brokers who give investment advice to individual clients.

The pension plan proposal also would have forced big brokerage firms such as Bank of America’s (BAC.N) Merrill Lynch & Co. and Wells Fargo & Co.’s (WFC.N) Wells Fargo Advisors to decide whether to limit their brokers from working with corporate retirement plans.

The Labor Department rule would not only limit brokers’ ability to recommend their companies’ own products to employers but prohibit them from collecting commissions from investment companies when employees purchase their funds or other retirement plan products without providing extensive disclosure.

“We have said all along that we will take the time to get this right,” Phyllis Borzi, assistant secretary of the Labor Department’s Employee Benefits Security Administration and chief architect of the proposed rule, said in a statement.

“Investment advisers shouldn’t be able to steer retirees, workers, small businesses and others into investments that benefit the advisers at the expense of their clients,” she said.

Industry groups applauded the decision. “This proposal went much further than anything the SEC is thinking of doing under its uniform fiduciary standard,” said Dale Brown, president and CEO of the Financial Services Institute, which represents independent broker-dealers.

Wells Fargo Advisors, a unit of Wells Fargo Corp. (WFC.N),and Morgan Stanley Smith Barney, a joint venture between Morgan Stanley (MS.N) and Citigroup (C.N), also commended the decision.

The political winds began blowing against the proposal when the broker-dealers began arguing that it would restrict their ability to sell Individual Retirement Accounts to investors.

Representative Barney Frank, the top Democrat on the House Financial Services Committee and co-sponsor of the Dodd-Frank financial reform law, last Thursday urged Secretary of Labor Hilda Solis to re-propose the rule in concert with fiduciary changes and other business conduct standards being studied by the SEC and the Commodity Futures Trading Commission.

The Department of Labor’s decision was surprising particularly because in Congressional hearings in August, Borzi was adamant about going forward with the proposal, said Jason Roberts, chief executive of Los Angeles-based Pension Resources Institute.

“It speaks volumes to the pressure the Department has gotten about this,” Roberts said.

Declaring victory, however, is premature, said Brian Graff, executive director and chief executive of the American Society of Pension Professionals and Actuaries.

“There is nothing in the DoL release to suggest that they are backing down from the big issue—which is really the application of the rule to IRAs,” he said.

Reporting by Suzanne Barlyn, Jessica Toonkel and Joseph Giannone in New York; Editing by Jed Horowitz, Jennifer Merritt and Walden Siew

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