Proposed new fiduciary rules from the U.S. Department of Labor have drawn mixed reviews from the retirement industry, but consumer watchdog groups are fans.
In April 2015, the DOL proposed expanding the definition of a fiduciary to effectively require anyone offering advice on or managing retirement accounts to act in the best interests of their clients. That standard already applies to registered investment advisors regulated by the Securities and Exchange Commission, but not to brokers regulated by the Financial Industry Regulatory Authority (FINRA) or insurance agents overseen by state insurance regulators. Brokers, for example, merely need to assure that an investment product is “suitable” for the client.
Many brokers have complained that the new rules would limit their ability to provide investment advice and services to retirement plans and their account holders. In a panel discussion at the 2015 SVIA Forum, representatives of two consumer groups largely discounted that idea and endorsed the DOL’s proposal.
David Certner, legislative counsel and director of legislative policy for government affairs at AARP, observed that under current rules, a broker can approach a client with two investments that are relatively equal in value but recommend the one with higher fees as long as both are suitable for the client.
“That’s obviously a problem for the consumer,” he said. “We need to do everything we can to make sure people are saving, and that those who do are getting good value and guidance for their money.”
“Regulators shouldn’t be setting minimum standards, and suitability is a minimum standard,” agreed Micah Hauptman, financial services counsel for the Consumer Federation of America.
Certner singled out for special praise the DOL’s proposal to extend fiduciary protections to IRAs, including rollover IRAs, which together now hold more assets than 401(k)s and other employer-sponsored defined contribution plans. He and Hauptman also said their organizations were generally supportive of the DOL’s plan to include a “best interest contract” exemption in the new fiduciary standards. That exemption attempts to preserve commission-based compensation arrangements for fiduciaries advising retail investors and small retirement plans, while still ensuring that any advice given is in the best interest of the client.
While broadly supportive of the proposed rules, Hauptman cited two areas where he thought they should be amended before final adoption. One revolves around the best interest contract exemption. As proposed, it applies to small plans where investment decisions are not controlled by participants, but does not apply to small plans where, as is common in the 401(k) world, investment decisions are controlled by participants. Hauptman argued that the exemption should apply to both types of plans. He also said the proposed rules should be clarified to make it clear that the exemption applies to advice on services, not just on products.
To be sure, not everybody is as happy with the proposed regulations as Certner and Hauptman. They were joined in their panel discussion by Don Trone, founder and CEO of 3ethos, and founder of the not-for-profit Foundation for Fiduciary Studies. Trone argued that “more rules and regulations will make it tougher for honest advisors to serve clients, and make it easier for dishonest advisors to hide behind the complexity of the rules.”
Trone criticized the DOL’s proposed new regulations for mentioning only one of what he said are a number of fiduciary best practices, and for taking a punitive rather than positive approach to encouraging ethical behavior. He also claimed that rules and regulations have never changed the moral and ethical conduct of people, and discounted the validity of a study by a White House Council of Economic Advisors concluding that conflicts of interest cost retirement savers about 1 percentage point in investment returns, or about $17 billion annually.
Addressing Trone’s comment about fiduciary best practices, attorney Michael Richman, a partner-elect with the law firm of Morgan Lewis Bockius, and also a member of the discussion panel, noted that he anticipates the DOL will issue final regulations in the Spring of 2016.
