OK, it’s official: my mind is blown by two new, smart, common sense, progressive initiatives that the Obama administration–with great input from Treasury and the Labor Dept.–has managed to implement this week. Each deserves, and will get, individual attention and explanation from me. But for now, let us marvel at what’s happened here, especially as you may be distracted by the political horse race.
The new conflict of interest rule
This new rule, as I’ve written before, requires financial advisors providing advice on retirement accounts (and 401(k)’s that will ultimately get rolled over into such accounts) to put their clients’ interests ahead of their own.
Boom. That’s it.
Now, you may have thought that’s what happens already, and with many ethical advisors, it surely is. But before these new regs, brokers could and did nudge retirement savers to investments with higher fees or a broker’s commission that did more for the advisor than the advisee. Now, these financial advisors must meet a “fiduciary” standard, meaning they “cannot accept compensation or payments that would create a conflict unless they qualify for an exemption that ensures the customer is protected.”
How big a deal is this? From one of my earlier pieces:
All of which turns out to be extremely costly to retirees at a time when too many older persons are financially underprepared for retirement. In what looked to me like a pretty unbiased review of the literature by White House economists, they find that conflicted advice reduces returns by about 1 percent per year, such that a poorly advised saver might end up with a 5 percent vs. a 6 percent return. They multiply that 1 percent by the $1.7 trillion of IRA assets “invested in products that generally provide payments that generate conflicts of interest” and conclude that the “the aggregate annual cost of conflicted advice is about $17 billion each year.”
The financial industry, as you’d expect, lobbied hard against the rule, but team Obama seriously stiffened their spines–Labor Sec’y Tom Perez was relentless in keeping the rule moving forward–while, at the same time, hearing out the opposition and accommodating many of their ideas to reduce the burden of the new reg.
This is one of the administration’s biggest wins for middle-class people trying to do the right thing and save for their retirement.
The new anti-inversion rules
Meanwhile, the Treasury Dept. surprised the heck out of me by making another run at blocking inversions, taking by far their most serious steps to date. So serious, in fact, that a few short days after Treasury’s announcement, Pfizer decided not to go forward with their long-planned inversion with now Irish (formerly New Jersey) company, Allergan.
I’ve written a lot about this too and won’t review details, other than to remind you that inversions are a tactic by which a domestic firm relocates its tax mailbox much more so than its operations. So these firms still fully avail themselves of US infrastructure, markets, an educated workforce and so on, but they avoid paying most of what they should for it.
One main tactic, the one Pfizer was clearly pursuing, is “earnings stripping,” which sounds bad and is bad. It’s where the former US firm–now a subsidiary of the foreign parent–loads up on debt issued by the foreign parent, which in US corporate tax law, gets deducted from tax liability.
Apparently, once Treasury blocked this form of tax avoidance, Pfizer decided it wasn’t worth it to move their mailbox.
To be very clear, these tax inversions are about one thing and one thing only: avoiding the US corporate tax. They are not about tapping some new efficiencies that will make firms more productive. To the contrary, they lead firms that make drugs, or hamburgers, or medical devices, to focus on tax law, not whatever it is they actually produce.
I’m sure the affected firms wouldn’t quite agree, but in that regard, you ask me, Treasury’s done them a favor. They can now spend less time trying to lower their tax bill and more time focusing on production.
One other point, and here I’ll get back to the horse race. Because Congressional conservatives would never have let either of these new rules become law, they’ve been run through executive action. That means the next president could reverse them.
In others words, as if the stakes in the next election weren’t already high enough, they just got a lot higher.