IRAs Under $5,000 Could Get Kicked to the Curb

NEW YORK (TheStreet) -- Brokerages might drop millions of Individual Retirement Account (IRA) investors, or convert them to higher priced services, if a proposed labor rule takes effect, a lobbying group argued at a hearing on Monday.

The U.S. Labor Department proposes to re-define the scope of fiduciary duty -- which places a client's interest first -- to include brokers that provide investment advice for retirement plans.

According to Wall Street trade group, the proposal will push brokerages to convert their commission-based accounts to advisory fee models that require higher minimum balances. There are at least 1 million accounts that have balances under $5,000 and 7 million that are under $25,000, according to some estimates. Many of these will have to be dropped.

The Labor Department is arguing for a change in the definition because currently fiduciary responsibilities apply to a narrow definition on what constitutes paid investment advice, such as how regularly the advice is rendered and whether it forms the primary basis for investment decisions.

However, the proposal has received stiff bi-partisan opposition. Opponents say the rule could increase the cost to service providers and investors and limit access to investment advice.

Ken Bensten of Securities Industry and Financial Markets Association (SIFMA) called for the proposal to be withdrawn in a testimony before the House Education and Workforce Committee. "The breadth and complexity in the provisions, the many significant changes that need to be made, and the uncertainty regarding the exemptions that will be required based on the final language, underscore the need for the Department to go back to the drawing board," he said.

SIFMA members include the largest banks, such as Bank of America (Stock Quote: BAC), Citigroup (Stock Quote: C) and JPMorgan Chase (Stock Quote: JPM).

Bensten said the proposed rule failed to take into account the impact of higher costs on IRA owners. "The real question is the cost to plans and their participants and the impact on their retirement savings. And while the Department's cost analysis leaves alarming gaps in what it does appear to understand or be certain about, its list of uncertainties does not even once mention IRAs," he said.

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